How to know if you can afford to retire in the next five years

Whether you can afford to retire depends on three numbers: the income you expect to have, the income you'll need, and how long your savings need to last. None of these is certain, but all three can be estimated. If you're within five years of retirement, this guide walks you through how to check whether your numbers add up and what to do if they don't.

Key takeaways

●     The PLSA comfortable retirement benchmark is £43,900 a year for a single person, but your own target may be significantly higher.

●     At 4% withdrawal, you need around £784,000; at 3.5%, around £896,000.

●     Retirement can last 40 years. Longevity risk matters more than market volatility.

●     If the numbers fall short, you still have meaningful levers within five years.

At Netwealth, our experienced financial planners help clients build a retirement plan and manage their personal pension in a tax-efficient way. Speak to our team today to find out how we can help.

Start with your retirement income, not your pension pot

The PLSA Retirement Living Standards give a concrete starting point.

Source: PLSA Retirement Living Standards 2025/26. Figures assume home ownership with no mortgage.

If you'll still have a mortgage or you are renting, add those costs on top.

How much pension pot do you need?

Step 1: Subtract your state pension

The maximum new state pension for 2026/27 is £12,547 per year, which may not provide a comfortable standard of living on its own. You need at least 10 qualifying NI years for any payment and 35 for the full amount. Check your forecast at gov.uk.

Those PLSA figures in the table above are a starting point, not a ceiling. Your actual target depends on your lifestyle, housing costs, and income expectations. To find your own figure, subtract your expected state pension from your target income.

Step 2: Apply your withdrawal rate

A withdrawal rate is the percentage of your pot you draw each year. Divide your required income by your withdrawal rate to find the pot size you need. The commonly cited 4% rule originates from US market data and is considered by many UK financial planners to be optimistic for UK retirees. 

A starting range of 3% to 3.5% is more commonly used in UK retirement planning, though the right rate depends on your tax position, investment mix, and how long your retirement lasts.

These figures are simplified illustrative calculations based on static assumptions. They do not account for income tax on withdrawals, investment returns during drawdown, or inflation. Your actual requirement is likely to be higher. Speak to a financial planner to model your specific position.

Step 3: Check where you stand

Compare your current pot against that figure, including projected growth over the next five years. Protect your savings while leaving enough growth to close any remaining gap.

Factor in your state pension timing and set period

If you retire before your state pension age, your pot must cover the full gap alone. The current state pension age is 66, rising gradually to 67 for those born between 6 April 1960 and 5 March 1961, and reaching 68 for those born on or after 6 March 1961. Check your own state pension age at gov.uk. Calculate the exact gap period and ring-fence funds for it.  

Example: funding £43,900 per year for five years requires approximately £220,000 in additional pot capacity on top of your long-term drawdown plan. Gaps in your NI record from self-employment, parental leave, or time abroad can be filled with voluntary Class 3 contributions. At around £957 per qualifying year in 2026/27, buying missing years is one of the highest-value moves available before you stop working.

How many years does your pension pot need to last?

It's increasingly likely that individuals could live to 100. Many people potentially need funds for 20 to 40 years post-retirement. Planning to 90 is standard; 95 is prudent for those in good health.

●     At your planned withdrawal rate, how long does your pot last if you live to 85?

●     How long if you live to 95?

That gap is where your longevity risk sits. If your pot runs out at 88, start saving more now and protect your future financial security while you still can.

Income options in later life: drawdown, annuity, or both

Pension drawdown allows you to take money directly from your pension while keeping the rest invested, providing flexibility in managing your income during retirement. An annuity provides a regular guaranteed income for the rest of your life once purchased, but it typically can't be changed after purchase.

Drawdown is the most commonly chosen option: FCA data shows 349,992 drawdown policies were sold in 2024/25, compared to 88,430 annuities. Using both together is possible and can work well. A smaller annuity can provide a guaranteed floor to cover essential costs, while drawdown handles the remainder with more flexibility.

Your tax-free cash and lump sum options

Flexible access to pension funds may allow for tax-free lump sums of up to 25% of your pension pot, capped at a lump sum allowance of £268,275, once the minimum pension age is reached (currently 55, rising to 57 from 6 April 2028). You can withdraw this as tax free cash, but any further withdrawals may be subject to income tax. Understanding the tax rules before you access funds helps you choose the most tax efficient way to take your benefits.

Types of pension: defined contribution, SIPPs, and workplace pensions

Retirement plans in the UK consist of Defined Benefit and Defined Contribution pensions, including workplace pensions, personal pensions, and Self-Invested Personal Pensions (SIPPs). Knowing which type you hold and how each one works is essential before you decide how to access your funds.

Workplace pensions and employer contributions

●     Workplace pensions are mandatory employer-provided schemes usually structured as Defined Contribution plans. Auto-enrolment mandates employers to contribute at least 3% of qualifying earnings. Those employer contributions add meaningful value over time.

●     Defined Contribution pensions depend on contributions and investment performance. Both employees and employers pay into a pot invested in assets like stocks and bonds.

Younger savers can afford higher-risk investments for greater potential growth due to their longer investment horizon. As you approach retirement, that shifts toward protecting the value you've built.

SIPPs, stakeholder pensions, and cash ISAs

●     SIPPs (Self-Invested Personal Pensions) allow a wider range of investment choices, including stocks and property, and are suitable for experienced investors who want more control.

●     Stakeholder pensions are personal pensions with capped fees and flexible contributions. They offer a basic low-cost option, though many modern platforms now offer greater flexibility and investment choice.

●     Cash ISAs sit outside the pension wrapper but form part of a tax efficient retirement strategy. Most people can save up to £20,000 each tax year into an ISA.

Watch your fees: how management charges affect your pot

High management charges can significantly reduce the total pension pot over time. A 0.5% difference in fees compounds into a meaningful shortfall over 20 years. It's worth comparing other providers if your current charges are above average.

The five-year window: what to do now with your savings account and pension

●     Maximise contributions: You can contribute up to your full annual earnings into a pension, capped at £60,000, and up to £20,000 into an ISA. Tax relief makes pension contributions particularly cost-effective for higher-rate taxpayers.

●     Use salary sacrifice: Savings accumulate more effectively due to the effects of compound growth, especially when started early. Salary sacrifice is a tax efficient way to accelerate this in your final working years.

●     Consolidate old pots: You likely have pension savings with other providers from previous jobs. The government's free Pension Tracing Service can locate them. Consolidating is a simple way to reduce fees and manage your funds. Read more about how to boost your pension's potential.

●     Fill NI gaps: A missing qualifying year costs around £957 in 2026/27 and can add hundreds of pounds annually to your state pension for life. It's one of the best ways to save money before you retire.

●     Review your savings account and ISA strategy: As retirement approaches, it's crucial to understand your tax position and the most efficient way to convert your savings into a regular income, which can be complex and may require specialist advice.

Use Pension Wise before you commit

Pension Wise offers free, impartial guidance for anyone aged 50 and over, covering everything from paying tax on withdrawals to understanding interest on savings. It's a useful starting point for making informed decisions about your options across other providers and income types. 

Consulting a financial adviser before making decisions about pension withdrawals is highly recommended, as they can provide expert guidance tailored to individual circumstances. They can also provide a personal recommendation tailored to your own circumstances.

Seeking impartial advice isn't a last resort. It's how you protect the pension savings you've spent decades building. Speak to an adviser early and you'll have time to act.

Build your dream retirement plan around realistic numbers

A shortfall at 60 isn't a crisis. The most common levers are:

●     Increasing your pension contributions in your final working years

●     Pushing your retirement date back by a year or two, which grows the pot and reduces the set period it must fund

●     Adjusting your income target, planning for higher spending in earlier retirement and lower spending in later life

All three together, modelled against your personal circumstances, often close a gap that looks daunting as a single number.

Secure your financial future with Netwealth

If you're within five years of retirement, the decisions you make now have an outsized impact on the income you'll have for the next 20, 30, or 40 years. You can start exploring your numbers straight away with our online planning tools, which let you model your retirement income across different scenarios before speaking to anyone. 

For a more personalised view, our financial planners can map your pension pots, ISAs, state pension entitlement, and other assets against your target income to show exactly where you stand and what needs to change.

If your numbers need work, our team combines integrated financial planning with award-winning investment management to help you retire on your terms.

Speak to our team today to see what your retirement could look like.

Please note: The value of your investments can go down as well as up. Netwealth offers advice restricted to our services and doesn't provide independent advice across the market. This article doesn't constitute financial advice and shouldn't be interpreted as a personal recommendation.

Frequently asked questions

What's the difference between pension drawdown and an annuity?

With drawdown, your savings stay invested and you draw a flexible income. An annuity converts your pot into a guaranteed income for life, removing longevity risk but giving up flexibility and growth potential.

What if I haven't saved enough for a comfortable retirement?

A shortfall at 60 isn't a crisis. Salary sacrifice, filling NI gaps, pushing your retirement date back, and adjusting your income target can all help. A combination of these, modelled carefully, often closes a gap that looks daunting as a single number.

When should I start planning for retirement?

The earlier the better, but the five years before your intended retirement date are the most consequential. That's when your pot size is at its largest, your tax decisions have the biggest impact, and you still have time to course-correct. Even if you're starting late, reviewing your state pension forecast, filling NI gaps, and consolidating old pots can make a meaningful difference to your retirement income.

How does Netwealth help me build a retirement plan?

Netwealth's planners use cash flow modelling to build a personalised retirement plan around your pot, savings, property, and income goals. Book a free call with one of our advisers to discuss your options.

Can I use Netwealth's tools to track my retirement plan over time?

Yes. MyNetwealth gives you a centralised view of your investments with tools to model your dream retirement across different scenarios. It's free to register, and Netwealth specialists are on hand as your circumstances change.

All information is correct at the time of the latest review date.

Read more

●     What I wish I'd known: lessons from retirees about retirement

●     I'm 68 and retiring soon: how can I limit taxes when I take out my pension?

●     5 crucial ways to boost your pension's potential

●     Pension or property: choosing your retirement mix