Is 2026 a good year to retire? Here’s what you need to know before taking the plunge

Personal considerations such as your health, wealth and family commitments will most likely determine the timing of your retirement.

But it’s helpful to look around at the wider environment, like what’s going on with stock markets, the economy and tax, when you’re about to make one of the most important financial moves of your life.

The new year has begun with turbulence, as the US shakes up the world order and financial markets with military aggression. 

Other indicators closer to home are far more positive – although those who plan to keep pension funds invested will always necessarily face a degree of risk.

‘Inflation has eased from recent peaks, the state pension is rising again, and strong market returns mean many pension pots are entering retirement in better shape,’ says Marianna Hunt, personal finance specialist at Fidelity International.

‘But frozen tax thresholds and unpredictable markets continue to complicate retirement planning. 

‘Stock market performance is always a risk for those relying on drawdown and it’s crucial to have a plan for how you would weather a prolonged downturn.’

Here’s what you need to know if you’re planning – or even just musing hopefully – on retiring this year.

Retirement planning: Getting started

You will need to turn your pension funds into an income that can replace your salary in old age.

There are a number of different ways you can do this, and what suits you best will depend on the type of pensions you have, what you have saved up so far, and how much time you want to devote to keeping an eye on your funds during retirement.

Read our five-step guide to retirement, which explains the financial decisions you face and where to find help, and find out what you can expect as you leave work for good here.

Clare Moffat, pension and tax expert at Royal London, says: ‘For most people, retirement is something that they have been looking forward to for many years. And it’s about a change in lifestyle.

‘Economic factors might make a difference to some but it’s important that people don’t make a knee jerk decision. 

‘A free, impartial appointment with Pension Wise will help you understand your options. But the gold standard in retirement planning remains taking financial advice.’

AJ Bell’s head of public policy, Rachel Vahey, warns: ‘Some may feel pushed to take action to keep one step ahead of government changes. 

‘We saw that in the run-up to the Budget that some people took their pension tax-free cash amid speculation the Chancellor was about to slash the allowance.

‘Those fears proved unfounded. Instead, it’s always best to make this big financial decision based on your situation rather than listening to rumours.’

Good reasons to retire in 2026

State pension increase

The full flat rate state pension will increase by an inflation-beating 4.8 per cent to £241.40 a week, or just under £12,548 a year, in early April.

It follows a run of decent rises in recent years, and people who don’t have a full state pension record – with 35 years required to get the full amount – can make voluntary National Insurance contributions to boost their payouts.

‘High inflation followed by high wage growth means that we have recently seen one of the largest multi-year increases since the triple lock began. 

‘This should help to support retirees’ incomes,’ says Marianna Hunt of Fidelity.

Vahey adds that you should bear in mind that the state pension age is going to rise gradually from 66 to 67 over the next two years. See below for when you can you start drawing it.

Vahey says: ‘You can usually access your private or workplace pensions from age 55, rising to 57 from April 2028.

‘If you have a defined benefit pension and are considering retiring earlier or later than the scheme pension age, your income may be adjusted down or up, as appropriate. It’s best to ask your pension scheme for the details.’

Easing inflation

Inflation hit two digits in the aftermath of the pandemic, but the Bank of England has slowly got it under control, though Hunt warns it remains a critical risk in retirement.

‘Fidelity’s analysis shows that if inflation stays at 3.6 per cent rather than falling to the Bank of England’s 2 per cent target, a typical pension pot could run out 11 years sooner,’ she says.

‘The Office for Budget Responsibility expects inflation to remain elevated at around 2.5 per cent in 2026, only returning to target in 2027,’ adds Hunt. 

‘However, the outlook is improving, and lower, more predictable inflation makes it easier for new retirees to plan spending.’

Staying invested? Too tough to call

Investors have enjoyed strong market returns in recent years, so you are likely to be retiring with a good foundation for your finances in 2026.

But past performance is no guide to the future and you have to expect bouts of volatility and market crashes if you decide to draw an income from investments in retirement.

You do have the option as well of buying a guaranteed income via an annuity, and you can combine drawdown and annuity income strategies for stability plus some potential investment growth.

That’s assuming you don’t have a valuable final salary, or defined benefit, pension which is guaranteed until you die.

These still prevail in the public sector but have been phased out in the private sector, which is why the guaranteed income you get from the state pension can be so important.

Hunt warns if you rely on drawdown rather than buying an annuity, market conditions in the first decade of retirement are crucial.

This is due to a nasty trap called ‘pound cost ravaging’ which can do severe damage to pension investments, especially in the early years of retirement (you might also hear it called negative pound cost averaging, or sequencing risk).

It means that when markets fall you suffer the triple whammy of falling capital value of the fund, further depletion due to the income you are taking out, and a drop in future income – so you can rack up big losses and never make them up again if you aren’t careful.

Hunt says: ‘High equity valuations have prompted some investors to question whether markets are in a bubble. A downturn early in retirement can significantly shorten how long a pension pot lasts.

‘Those worried about market volatility may reduce equity exposure, hold more cash to avoid selling investments during downturns, or phase into retirement through part-time work.

‘Others may opt for a blended approach, using an annuity to cover essential spending while relying on drawdown for more discretionary income.’

Reasons to be cautious about retirement

Falling interest rates

Since the Bank of England mostly got on top of inflation, it has started cutting interest rates again and this cycle is expected to continue in 2026.

That’s helpful if you still have a mortgage at retirement, but not if you want a decent income from cash savings or are interested in buying an annuity for the guaranteed income.

‘Falling interest rates can hit retirees relying on savings, so securing competitive fixed rates is important for short-term cash needs,’ says Rebecca Williams, divisional lead of financial planning at Rathbones.

‘Meanwhile, keeping some money invested has a good track record of delivering better returns than cash over the long term.’

Falling interest rates also affect the annuity deals offered by insurance firms, making them less attractive.

‘Annuity rates have likely peaked and are starting to fall, so if certainty is important, now’s a good time to shop around,’ says Williams.

‘Don’t just stick with your pension provider, as others may offer better deals, especially if health conditions could improve your rate.’

Hunt says: ‘The Bank of England is expected to continue cutting interest rates through 2026, with the consensus pointing to a fall from 3.75 per cent today to around 3.25 per cent by year end.

‘This can be a double-edged sword for new retirees. Lower borrowing costs will be helpful for some, but lower annuity rates and weaker returns on cash savings can reduce long-term income.’

To illustrate how annuity deals can change, Hunt says as of December 2025 a healthy 66-year-old with a £300,000 pension could use that pot to buy an income of around £22,447 a year. Five years ago, you would have got closer to £13,5004.

That’s for a single-life level annuity, one with no benefits for a spouse after you die and no annual increases to protect you from inflation.

Tax changes

‘Frozen income tax thresholds will pull more pensioners into paying tax,’ says Hunt.

 ‘In addition, from April 2026 the ordinary rate of dividend tax will rise from 8.75 per cent to 10.75 per cent and the upper rate from 33.75 per cent to 35.75 per cent.

‘This will affect retirees drawing dividend income from investments held outside pensions and Isas.’

Meanwhile, pensions will be drawn into the inheritance tax net from April 2027, but do check your estate will be big enough to be liable for inheritance tax when you die before worrying about this issue.

Rachel Vahey of AJ Bell says: ‘If you have built up substantial funds in your pension you may want to think about whether you should be accessing your pension to spend or gift funds. These can be tricky decisions, so you may want to ask a financial adviser to help you navigate this.’

Read our guides to protecting your pension from inheritance tax and defending your retirement fund from tax more generally.