Approaching retirement: a step-by-step guide

  • What you should consider as you near retirement, from pension forecasts to how to take your income
  • How to top up your pension income
  • Tax-free lump sums and whether you should take one
As you reach retirement, there are a few steps you'll need to take to ensure you make the most of your pension savings so you can enjoy a comfortable future. We've got the 10 most important things you need to consider when you're approaching retirement:

Step 1: When do I want to retire?

Retirement is no longer a fixed time in your life – you can take early retirement or carry on working beyond state pension age.

If you decide you want to retire early, you can start claiming your workplace or private pension from age 55, but your state pension won't be available until you reach state pension age. Taking early retirement can be an attractive option if you don't like your job or want a change of pace, but you should remember that you're likely to receive a smaller pension if you retire early.

Working beyond retirement age is becoming more popular. If you do carry on working, you'll no longer have to pay National Insurance. You can also delay drawing your state pension, which means you'll get a bigger amount when you do come to retire.

Step 2: Get a pension forecast

Six months before you retire, you should contact your current and previous pension providers to find out what your final pension will be and how it will be paid to you. If you're enrolled in a workplace pension scheme, contact the pension trustee to find out how much you’ll get. If you have a personal pension, contact the provider. 

You can get a state pension statement on the government's website. The Pension Service should contact you four months before you retire to tell you if you need to claim your state pension. If they haven’t contacted you, you should contact them on 0800 731 7898.

You should also let HMRC know you are retiring four months beforehand.

Step 3: Should I consolidate my pots?

As you get nearer to retirement, you may decide you want to consolidate all your workplace and personal pensions in one place. 

This may be a good idea if you're unhappy with your existing arrangements and you think your investments underperforming, and it also makes buying an annuity or going into drawdown easier, as all your money will be in one place. However, beware of exit penalties – you'll have less time to recoup the cost before you retire. 

Step 4: How much money will I need in retirement?

It's unlikely you'll need as much money as you did when you were working, but you may spend more money on heating your home and leisure activities once you’ve stopped working.

Planning a budget based on how much pension income you'll receive and what you're likely to be spending your money on will help you identify any shortfalls in your pension income.

Step 5: Do I need to top up my pension income?

Once you've worked out how much money you're getting and how much money you'll need in retirement, you may find that you have a shortfall. But don't panic – you can boost your income.

On your state pension, you can make additional payments to 'buy' any National Insurance (NI) years you missed payments for, perhaps because you were out of work or caring for family. You can find out of you have gaps in your NI record by getting a state pension forecast online. Deferring your state pension could also get you a higher amount.

People qualifying for the state pension before April 2016 can also top up their state pension.

Step 6: Claim any benefits

Find out if you're eligible for pension credit, which can top up your basic state pension to £155.60 (2016/17) for single people and £237.55 for couples. You should also register for the winter fuel allowance, which can be worth up to £300, and you may be eligible for the cold weather payment, if you’re claiming certain benefits.

You should also register for a free bus pass, a senior railcard, cheap healthcare and a free TV license. 

Step 7: Where do you want to retire?

If you want to retire abroad, you'll have to notify the DWP of your new country of residence so you can claim your state pension. You'll also have to let your private pension provider know, so they can transfer your payments to a bank in your new country.

One thing you may need to consider when retiring abroad is the tax status of any lump sum you may take from your pension scheme. In the UK, 25% of your savings can be taken tax free – so check the tax regime in your new country. 

  • Retiring abroad - our guide has more information on spending retirement overseas. 

Step 8: Buy an annuity or take income drawdown?

You should think about how you want to take your pension income. Many people traditionally bought an annuity, which pays out a guaranteed amount each month. Remember to shop around for the best deal using the open market option (OMO), and always mention any health conditions – they could secure you an enhanced annuity, boosting your income by 40%.

Income drawdown is when your pension remains invested while you take income from it, so you can benefit from fund growth. The pension changes mean that more people are opting for income drawdown. Income drawdown can be complicated, so speaking to a financial adviser is a good idea.

Since April 2015, you have been able to withdraw as much of the money as you want when you reach 55, although it will be taxed as income.

Step 9: Think about a tax-free lump sum

When you take your personal or workplace pension, you’ll probably get the option to take part of it as a tax-free lump sum. The maximum is 25% either of the total value of the pension pot or 25% of your remaining lifetime allowance.

Before you take a lump sum, consider the impact it will have on your pension pot – you’ll be left with less money with which to buy an annuity or to use for income drawdown. However, the tax-free aspect of the lump sum means it’s usually worthwhile. 

Step 10: Consider getting some advice

If you've got particularly complex needs in retirement, have built up multiple pension pots, or need help with investing any of your spare cash, it's well worth seeking financial advice.

The government's Pension Wise service can also help you decide what to do. 

The Which? Money Helpline has a team of qualified experts who can help talk you through any queries and help you find the right adviser. Sign up to a £1 trial with Which? and speak to one of our experts. 

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Last updated:

April 2016

Updated by:

Paul Davies

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.