Three common pre-retirement mistakes (and how to avoid them)

It’s no secret that retirement takes a significant amount of planning.

From financial planning for retirement to deciding how you want to spend your time after you close the door on your last day of work, there’s a vast number of things to consider.

Understandably, the financial and emotional complexity of this significant milestone can feel overwhelming for many people. A tailored and thorough retirement plan can help to alleviate many of these anxieties, and empower people to have a truly enjoyable and fulfilling retirement.

The risk comes however when, instead of making a plan pre-retirement, this is put off until the last minute – and while it’s not impossible to make an effective plan once you reach retirement, planning sooner can give you greater options in the long run.

In this article, we’ve explored some of the most common mistakes people make pre-retirement, and how they can be best avoided and managed.

Avoid these three common pre-retirement mistakes:

1. Leaving your pension planning to the last moment

Pensions are a critical component of any financial planning for retirement. After all, the income you receive from your pension will determine much of what you can and can’t do during your retired years.

Leaving pension planning until the last minute might potentially set you back, so it’s worth thinking about the following things as far in advance as you can:

What pensions you currently have, such as:

• Workplace pensions. The average person in the UK now has around nine different jobs in their lifetime, all of which may provide pensions from different companies. It’s important that you account for all of those pensions before you reach retirement. If you’re unsure whether you may have a “lost” pension, this article may help.
• Personal pensions. These are pensions you arrange yourself, such as Self-Invested Personal Pensions (SIPPs).
• State pension. The pension you receive from the Government. Ensure you’re aware of when you can access your state pension (particularly if you’re planning to retire earlier).

How you’ll want to access your pension in retirement.

There are multiple ways to access your pension – and each have their benefits and drawbacks:

1. Take some or all of your pension as a lump sum – while up to 25% of your lump sums can be taken tax-free (more on pension taxes below), this method means your retirement income isn’t guaranteed, and you’ll need to plan carefully to make sure your money lasts.
2. Buy an annuity – an annuity is a financial product that turns some or all of your pension into a guaranteed income, usually for life. The potential downside to this is that they are inflexible, as you can’t take more or less than what you initially agree, and most annuities are not investment linked, so you could end up with less money than if you chose to invest it.
3. Income drawdown – this is a way of taking income while keeping your pension invested. It offers flexibility over how much and when you withdraw. The drawbacks here are that income from drawdown is not guaranteed, and investment values can fall as well as rise, so you may get back less than what you invest.
4. A combination of these – as an example, you could use part of your pension pot to buy an annuity, and then leave the remaining money in drawdown. A qualified financial planner will be able to work with you to decide the most optimal approach for your needs and goals.

3. How your pension income may be taxed.

Currently, if your total income from your pension is on or below the personal allowance of £12,570, you will not need to pay any tax (this rate is frozen until 2031, but still subject to change). However, anything above this amount will be taxed in bands (more information is available about this here). If you decide to take up work after you’ve retired, your pension and the income from your job will be combined to determine how much tax you pay.

2. Not planning for your retirement income beyond the short term

As shared in our Guide to Retirement, there are generally three main “phases” of retirement:

1. The run-up (0–10 years before retirement)
2. The big event and the early stages
3. The “new normal” (settled retirement)

The big event is predominantly characterised by finding new sources of structure, purpose and meaning – delving into hobbies and travel, taking on part-time work or volunteering, or spending more time with loved ones.

However, it’s important to plan financially for the years beyond this – particularly in the early stages of retirement, where risks such as longevity, overspending, low returns and market changes can have a big impact on your financial stability.

It’s also worth thinking about the distant future, too. What happens when you’re not around anymore? This may be a long way off, but planning for your estate sooner rather than later may help you understand the options available and the potential tax implications – particularly as most unused pension funds and death benefits will be subject to Inheritance Tax from 6 April 2027 onwards.

This is where tools like Cash Flow Modelling can be particularly helpful. In short, this provides a complete overview of your finances, and forecasts future cash flows over a specific period to understand how your money will move in and out over time (though it’s not without its limitations*). A financial planner can then work with you to make adjustments to your financial plan in line with your retirement goals.

3. Underestimating the emotional impact of retirement

Retirement is a significant milestone in life and can be accompanied by a range of emotions. Many of these are positive, such as a newfound sense of freedom, and excitement for the years of work-free days ahead.

However, for many, leaving a job is not simply a case of walking out of the office building, but also saying goodbye to colleagues and friends who you’ve developed positive working and personal relationships with. There’s also the loss of routine to consider, and the sense of purpose that a career can provide.

In short – and as research consistently finds – the emotional impact of retirement should not be underestimated.

It’s therefore advisable to think beyond your financial planning for retirement to consider how you can take care of your emotional wellbeing, such as:

Phased retirement – this flexible retirement option means you can carry on working part time, and test the waters of what full retirement might look like for you, whilst using some of your pension to keep your income topped up.

Establishing a new routine – it can be helpful to plot a new routine for yourself in place of your work one, so that the sudden change from all-to-nothing isn’t as great a shock.

Arranging social engagements – whether it’s with old colleagues, friends outside of work or family, keeping a social calendar can help to reduce feelings of loneliness and isolation.

What you’d like to do with your free time – what have you always thought “I wish I had more time to do that” about while you’ve been working? What hobbies, interests or activities will retirement give you the freedom to pursue? This may help to give you a sense of purpose when work wraps up.

We’re here to help.

At Attivo, our qualified and experienced Lifestyle Financial Planners have supported thousands of retirees and their families with financial planning for retirement over the years, helping them navigating pensions, IHT, estate planning, and the ever-changing economic landscape to not only achieve financial peace of mind, but enjoy the lifestyle they worked so hard to build to the max.

If this is something you would like to explore for yourself, we’d be delighted to discuss this with you in a free retirement consultation. There’s no requirement to use our services afterwards (should you wish to, any charges will be explained in full before you commit), but it’s a great way for us to get to know you and your individual needs and see if we’re a good fit to plan for your retirement together going forward.