5 major pitfalls in retirement and how to deal with them

Today’s pensioners are often considered to be at a significant financial advantage when compared to younger generations. 

However, our survey of retirees in June 2024 shows that older people are feeling the pinch too, with one third more worried now about their financial future than they used to be. 

Here we explore the financial challenges you could face in retirement and what you can do to deal with them. 

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1. Running out of money

Most workers today have defined contribution (DC) pensions, which require more decision making at retirement than final salary or defined benefit (DB) schemes. 

Instead of paying a guaranteed income for life, like DB schemes, it's your responsibility to make sure the money in your DC pension lasts throughout your retirement. 

You can access this money in different ways. Pension drawdown involves keeping your savings invested and taking an income as and when you need. 

You'll need to be careful about withdrawing too much - especially when markets are falling, as this can make it harder for the value of your pot to recover.

Opting for an annuity allows you to swap your pension savings for a guaranteed regular income that will last for the rest of your life. 

You also have the option to take lump sums from your pension, or cash it in entirely. 

You can combine different options, either at the same time or to cover different phases of your retirement.

If you take out an annuity as a result of using the service from HUB Financial Solutions, Which? will earn a commission to help fund our not-for-profit mission

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2. Having to pay for healthcare

Some 63% of respondents in our survey of over 13,500 retired and semi-retired Which? members agreed that paying privately for dentistry, healthcare and long-term care now has to be considered part of normal retirement planning. 

Between 2011-13 and 2020-22, healthy life expectancy - defined by The Office for National Statistics (ONS) as an estimate of lifetime spent in ‘very good’ or ‘good’ health, based on how individuals perceive their general health - dropped from 63.2 to 62.4 for men and from 63.9 to 62.7 for women in England. 

These numbers have also fallen in Wales (to 61.1 for men and 60.3 for women) and Scotland (60.4 for men and 61.1 for women).

If you're concerned about NHS waiting lists, taking out private medical insurance will mean you'll be seen much faster, but premiums can be expensive - and they get more so as you get older. 

• Find out more: Best private health insurance 2024

3. A large tax bill

You'll pay income tax on any income above your tax-free personal allowance of £12,570 - and that includes income from pensions.

Given the state pension alone is worth almost £12,000 a year, the likelihood is that you will pay some tax when you take other sources of income into account.

Spreading withdrawals from your pension across tax years can help keep your tax bill to a minimum, as you'll be making use of more than one year's tax-free allowance.

When you first take a lump sum from your pension, you might be hit with an unexpectedly large tax bill due to a quirk with HMRC's systems. 

Between 1 July and 30 September, HMRC repaid a total of £44.m to pension savers who had been overtaxed.

• Find out more: are you owed a pension tax refund?

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4. A wait for the state pension

The fact that healthy life expectancy is going down while the state pension age continues to rise means more people could end up struggling financially because they are too sick to work but too young to claim the state pension. 

The age at which you qualify for the state pension is currently 66 and will rise to 67 between 2026 and 2028. 

Those qualifying for the full new state pension receive £221.20 a week in 2024-25, rising to £230.30 in April 2025. 

But you won’t necessarily get the headline amount. Those getting the new state pension receive an average amount of around £190 a week. 

One way to increase your state pension is to plug any gaps in your National Insurance record by buying voluntary Class 3 National Insurance Contributions (NICs). 

Under normal rules, you can only fill gaps in your NI record from the past six years. 

But if you reached state pension age after 6 April 2016 (or are yet to reach it), you have the option to plug gaps going back to 2006 - although the deadline to do this is April 2025.

• Find out more: Should I top up my state pension?

5. Rising prices

Inflation may now have returned to the government's target of around 2%, but higher costs are still making a dent in household budgets. 

Rising prices can be particularly tough on retirees as their incomes are more likely to be fixed.

Not all age-related benefits are paid automatically so make sure you get the most of what is on offer, including:

• Winter fuel payment: Now only available to those receiving pension credit or other means-tested benefits, the payment is worth £200 for eligible households, or £300 for eligible households with someone aged over 80.  Payments are automatic and take place in November and December. 

• Pension credit: If you’re over state pension age and on a low income, pension credit tops up your weekly income to £218.15 if you’re single, or joint weekly income to £332.95 if you have a partner. Pension credit isn’t paid automatically, see gov.uk or call 0800 991234 to claim.

• Travel discounts: In most parts of England, you qualify for a free bus pass – usually covering travel between 9.30am and 11pm – once you turn 66. Those living in Scotland, Wales, Northern Ireland, Merseyside and London can claim the travel concession at 60, with free rail, Tube and tram travel sometimes included. Local authorities and devolved governments can provide discretionary concessions before 66 from their own funds.

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