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January is a popular time to reflect on the past, look to the future, and set new goals for the year ahead.
If your top priority is to retire in 2026, you’ll need to ensure you have enough savings and investments to fund the lifestyle you want after leaving work behind.
Read on to discover four simple steps to take now if you want to retire with confidence this year, knowing that your finances stack up and you can fully embrace this exciting next chapter.
1. Decide what you want your retirement to look like
Before you can accurately assess if you have enough money to stop working this year, you need to understand how much income you’re likely to need throughout your retirement.
This means getting clarity on how you plan to spend your free time and what retirement goals you have. Are you likely to have any big, one-off expenses, such as travel or paying for your child’s wedding? Will your everyday costs remain the same as they are now, or will your plans – such as new hobbies or contributing to your grandchildren’s school fees – increase your income needs?
It’s important to remember that your spending in retirement may change over time. For example, you might need more money in the early phase as you rush to check off long-held ambitions while you’re relatively young and fit. Your income needs may then plateau for a while before rising again as you get older, when you could face higher medical or care bills. This spending pattern is often called the “retirement smile”.
However you expect your retirement lifestyle to look, you’ll need sufficient funds to maintain it – and cover any unexpected expenses – for the rest of your life. This could mean funding a retirement that lasts 30 years or more.
2. Review all your assets and sources of income
Once you have a solid grasp of your retirement income needs, it’s time to see if you can afford to maintain this lifestyle without working full time.
You’ll need to take stock of all potential sources of income, which might include:
- A State Pension (once you reach your State Pension Age) – You can get a State Pension forecast from the government website to find out how much you could receive.
- Workplace and private pensions – Use the government’s pension tracing service to help you track down any “lost” or forgotten pension pots.
- ISAs and cash savings – These could be a valuable source of funds for short-term expenses and emergencies.
- Investments outside pensions – Assets to consider include rental property and stocks and shares.
- Any ongoing earnings – If you plan to continue working in some capacity (for example, as a freelancer), be sure to include the potential earnings in your calculations.
You might also have opportunities to free up capital to supplement your income, such as by downsizing your home to release some of the equity.
3. Create a realistic budget
Now that you have an accurate estimate of your retirement expenses and your income, you can create a detailed budget to help you decide if leaving work behind in 2026 is feasible.
Include both essential expenses, such as housing and food, and discretionary spending (the fun stuff). These may change throughout your retirement, so you need enough financial wiggle room to keep on top of everything if your costs go up.
Remember too that inflation is likely to rise over time, which could increase your living costs while simultaneously reducing the purchasing power of your cash savings.
Happily, there are lots of budgeting apps that can help you create and track your income and outgoings. You might also find it useful to have a “trial retirement” by living on your planned budget for a few months to see if it’s sustainable. This may help you to identify any shortfalls or surpluses and tweak your budget accordingly.
4. Decide how to withdraw funds from your pensions
You’ve probably spent years paying into your pensions, accumulating the wealth you need for a long and enjoyable retirement. Yet, despite all this hard work and preparation, you might not have given much thought to how you’ll withdraw funds from your pensions when the time comes to move from saving to spending (this transition is known as “pension decumulation”).
Unfortunately, neglecting this crucial step of retirement planning could lead you to:
- Take too much too soon – This may increase your risk of running out of money in later life.
- Pay more tax on your pension wealth – For example, by exceeding the Lump Sum Allowance (LSA), which limits the amount of money you can withdraw tax-free from your pension to £268,275 in the 2025/26 tax year.
- Trigger the Money Purchase Annual Allowance (MPAA) – This reduces the amount of tax-efficient pension contributions you’re allowed to make in a single tax year, which could be restrictive if you plan to continue working in some capacity after you retire. The MPAA is usually triggered when you start drawing flexibly from your pension.
- Underspend in retirement – Being overly cautious about spending could result in a reduced quality of life and missed experiences.
In contrast, a solid pension decumulation plan could help you turn your pension pot into a sustainable income.
Read more: Pension decumulation – How to build a sustainable retirement income
There are three main options to consider:
Flexi-access drawdown
This allows you to draw funds from your pension as and when you need to. As such, you have the flexibility to match your income to your changing needs while your remaining funds stay invested.
You can usually take up to 25% from each of your pensions as a tax-free lump sum, provided that the total withdrawn across all your pensions doesn’t exceed the LSA.
An annuity
You could use some or all of your pension fund to buy an annuity that provides a guaranteed income for a fixed period (typically your lifetime). Some annuities are index-linked, meaning payouts rise with inflation.
A hybrid approach
Investing some of your pension funds in an annuity and leaving the remainder available for flexi-access drawdown could offer a balance of flexibility and security.
Get in touch
Our financial planners can use sophisticated cashflow modelling software to help you visualise how your retirement finances might look if you retire this year.
We can then help you create a strategy for maintaining a sustainable retirement income that aligns with your circumstances and goals.
To learn more, please email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning or cashflow planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pensions Regulator.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Approved by Best Practice IFA Group Ltd on 23/12/15