What to expect in the first 5 years of retirement (and how to prepare)

Retirement is one of the most important transitions you’ll experience in your life.

All at once, your free time opens up while your responsibilities quieten down, your pension becomes your main source of income, and your finances revolve around spending over saving for the first time in your life.

Surprisingly, many people are unaware of or unprepared for the financial aspects of this transition. The Department for Work and Pensions found that 77% of defined contribution (DC) pension holders aged 40 to 77 did not yet have a clear plan for how to start accessing their pension pot.

Retirement requires significant financial and emotional planning. Keep reading to learn the key changes coming your way in the first five years of retirement and how you can prepare.

Get ready to spend more during the “go-go” years of retirement

In the first five years of retirement, also known as the “go-go” years, you will probably spend more than you normally would.

This increase is usually down to:

• Rewarding yourself after a lifetime of work with holidays and meals out
• Filling your free time with hobbies and interests
• Taking advantage of your good health by travelling the world or ticking off other experiences from your bucket list.

If you are retiring in the next 10 – 20 years, it’s important that you adequately prepare your retirement plan for this high initial spending.

For example, while you are still working, you might increase your pension or ISA contributions to boost your spending capacity in time for early retirement.

A budget can also help organise your finances in advance of retirement.

Speak with your partner to establish shared expectations for your ideal retirement lifestyle. From this, you can work backwards, calculating how much it’s likely to cost and creating a savings and investing plan to meet this financial objective.

Financial advice can help you find out what options work best for you.

Embrace quieter days in retirement

One of the most startling changes for retirees, particularly those leaving demanding professions, is the leap from a busy work schedule to a quiet, relaxed retirement lifestyle.

Retirement allows you to gain complete control over your time, activities, and social life. If you thrive in busy, high-pressure environments, you might struggle to adjust to these new freedoms.

Several lifestyle and financial planning strategies can help make this transition easier.

Creating a new routine in retirement can keep you engaged and active for what would have been your normal working day. This might involve varying your time with new hobbies, clubs, or learning opportunities.

If you’d prefer a softer transition, you may opt for a phased retirement instead – gradually reducing your working hours from full-time to part-time over the course of a few years.

Get to grips with how your retirement income is taxed

Pension withdrawals adhere to standard Income Tax rules – your income is tax-free up to your Personal Allowance of £12,570, and any further income is charged according to the standard Income Tax bands.

You are also entitled to a 25% tax-free pension lump sum up to the Lump Sum Allowance, currently fixed at £268,275 for the 2026/27 tax year.

If you choose flexi-access, you could spread your 25% tax-free pension entitlement across all your withdrawals rather than as a single lump sum. You could also blend your retirement income with withdrawals from other tax-efficient accounts, like ISAs, to ensure you keep tax to a minimum where possible.

It’s important that you account for Income Tax and consider ways to maximise the efficiency of your withdrawals. Otherwise, unexpected tax liabilities might reduce your spending power over the years.

Remember that, on top of your taxable pension income, you could be taxed on money you receive from rental properties or the sale of certain assets.

Read more: 5 dangerous pension misconceptions that might affect your retirement plan

Shift your mindset to living on a finite income

Switching from building your retirement pot to withdrawing money from it can be a significant psychological barrier for retirees.

It’s normal to feel anxious about the possibility of unexpected events, like an illness, home repairs, or a new car, derailing your retirement wealth. In fact, Aegon reports that unexpected costs continue to be the primary financial worry for Brits.

While you cannot predict what the future holds, you could prepare for it by setting up a retirement emergency fund. This holds 1 to 3 years’ worth of essential living costs, which can be a valuable financial buffer against life’s unexpected twists and turns.

A financial planner can help you decide how large your fund should be based on your level of caution, as well as provide a roadmap for building it, to help you find reassurance about the security of your retirement wealth.

Get in touch with a Kellands financial planner today

Our award-winning team at Kellands can help you prepare for all the realities of retirement to ensure that you live comfortably and confidently.

Email us at hale@kelland.co.uk, or call 0161 929 8838 today to learn more about how we can help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals 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.

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.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

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.

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