Most aspects of financial planning are centred around preparing for retirement. That’s typically the end goal that people look to for their financial plan. 

When will I have earned enough to be able to stop working?

In this guide, we explain the 5 key steps to financial planning, and how to get them right.

What are the 5 Steps of Financial Planning

What are the 5 Steps of Financial Planning?

The 5 steps of financial planning are:

  1. Working out how much you spend
  2. Getting your state pension forecast
  3. Gathering information on your pensions, savings and investments
  4. Establishing the best way to structure your income
  5. Ascertaining the biggest risks to your retirement

Let’s break each of these down is more detail.

1. Working out how much you spend (and will spend)

Firstly, getting a clear picture of your current spending is the foundation of effective financial planning.

You need to know where you are before you work out where to go. 

This figure may change in retirement, but it’s a good indicator of what you’ll be spending once you’re there – it’s not an exact science, but the closer you can get to the actual figure here, the better.

This means looking closely at all your fixed, non-negotiable payments – things like your mobile phone contract, broadband, utility bills, and any other regular expenses that don’t tend to fluctuate much month-to-month.

But it’s also crucial to go through your bank statements in detail and calculate averages for your variable spending. This might include things like groceries, fuel, entertainment, eating out, and so on. The more meticulous you can be in tracking where your money is going, the better.

Why is this so important? Well, understanding your current expenditure allows you to forecast what your future spending is likely to look like. 

This forms the baseline for your overall financial plan. 

If you know you’re currently spending £2,000 per month, for example, you can reasonably expect a similar level of outgoings in retirement, with perhaps some adjustments up or down depending on your lifestyle goals.

Being this granular with your spending analysis also helps identify areas where you might be able to cut back or become more efficient. Maybe you’re paying for unused gym memberships or subscriptions you’ve forgotten about. Tackling those “quick win” opportunities can free up more money to put towards your long-term priorities.

2. Getting your state pension forecast

The state pension is likely to form a significant portion of your retirement income, so it’s vital to understand exactly what you can expect to receive. Luckily, you can request a state pension forecast online, either by post or by logging into the government’s portal.

This will show you the current value of your state pension entitlement, based on your National Insurance contribution record to date. It’s important to review this carefully, as you may be able to top up any previous years where your contributions were lacking. In most cases, doing so is a financially savvy move if you can afford it, as it boosts your future state pension.

The other great thing about the state pension is that it’s “triple locked”, meaning it increases each year in line with whichever is higher: average earnings, inflation, or 2.5%. This provides a valuable foundation of inflation-protected income for your retirement.

Of course, the state pension alone is unlikely to be enough to fund the lifestyle you want in later life. But understanding this baseline income is a crucial first step in building your overall financial plan.

3. Gathering information on your private pensions, savings and investments

In addition to the state pension, you’ll need to gather details on any private or workplace pensions you have, as well as any other savings and investments. This includes:

  • Current valuations
  • Your contribution levels
  • The underlying investments
  • Withdrawal terms and any potential tax implications

Getting a full picture of your existing pension and investment assets is essential for identifying gaps or imbalances in your portfolio. It also allows you to assess whether you’re on track to meet your retirement income goals, or if adjustments are needed.

For example, you may have a few different pension pots from previous employers. Reviewing the investment performance, fees, and accessibility of these can help you decide whether to consolidate them into a single, more efficiently managed plan.

Similarly, understanding your current savings and investment holdings gives you the information you need to ensure your overall asset allocation aligns with your risk profile and long-term objectives. This might involve rebalancing your portfolio, changing investment strategies, or simply topping up certain areas to create the right balance.

You may wish to make the use of your SIPP allowances, for example, and reap the tax benefits often associated with additional pension contributions – especially for high earners.

4. Establishing the best way to structure your income

When it comes to your retirement income, tax efficiency is key. You’ll need to carefully consider the implications of drawing from different sources – your state pension, private/workplace pensions, savings, and investments.

For instance, withdrawals from a private pension are generally taxed as income, whereas accessing your tax-free cash lump sum can be a more efficient way to supplement your lifestyle. 

Meanwhile, carefully timing the drawdown of your pension and investment assets can help minimise the income tax you pay.

Beyond pensions, other financial vehicles like ISAs, investment bonds, and inheritance tax planning tools can all play a role in structuring your retirement income in a tax-advantaged way. The specifics will depend on your individual circumstances and goals.

It’s also worth thinking about your overall estate planning. If you want to pass on wealth to your loved ones, certain asset types are better preserved for this purpose than others. A financial planner can help you navigate the complex landscape of income tax, capital gains tax, and inheritance tax to ensure your money ends up where you want it.

5. Ascertaining the biggest risks to your retirement

No financial plan is complete without a thorough assessment of the potential risks to your retirement. After all, life is full of the unexpected, and it’s important to plan for contingencies.

Some of the key risks to consider include:

  • Longevity risk – Living longer than expected and potentially running out of money
  • Market risk – Volatility in investment returns impacting the value of your pension and savings
  • Inflation risk – The eroding effect of rising prices on your purchasing power
  • Health/care costs – The potential need for expensive long-term care in later life
  • Unexpected events – Things like job loss, divorce, or other major life changes

It’s also crucial to regularly review your plan and make incremental changes as your circumstances evolve. What looks like a robust strategy today may need to be adapted in the future as new challenges arise.

Importantly, assessing risks isn’t just about protecting the downside. It’s also about ensuring you’re not being overly cautious and missing out on opportunities to enhance your financial wellbeing in retirement – they’re your golden years, after all! 

A skilled financial planner can help you strike the right balance.

What is the financial planning process?

So, what does the process of getting your financial plan sorted actually look like? It usually starts with a quick call or meeting with a financial planner.

This initial conversation is a chance for both you and your planner to gain a general understanding of your situation and what financial planning might entail for you. You’ll generally discuss your goals, concerns, and expectations, and your planner will provide an overview of their services and how they typically work with clients.

If you both feel confident that they can add value, they’ll then arrange a more comprehensive initial meeting. This could be over the phone, via video call, or in person – generally whatever works best for you.

During this meeting, they’ll dive deeper into your specific circumstances. They’ll need to gather detailed information about your income, assets, liabilities, and any other relevant financial details such as your objectives, risk tolerance, and timeline.

Armed with this information, your planner will then outline how they propose to work with you, including the initial and ongoing costs involved. This ensures complete transparency from the outset.

If you do want to proceed, the next step is typically for your planner to create your bespoke financial plan. They may charge a fixed fee for this service, which covers:

  • Obtaining information from your various providers (pensions, investments, etc.)
  • Completing a detailed risk assessment to understand your attitude to risk
  • Preparing a comprehensive lifetime cashflow projection
  • Providing you with tailored recommendations and advice

This financial plan meeting is often the “aha” moment with financial planning. It’s where everything really clicks into place, and you can envision what your financial future could look like and the steps needed to get you there.

Following the meeting, you’ll generally get a full financial plan document, complete with key information, analysis, and recommendations. At this point, your planner should also agree on any implementation and ongoing advice fees before putting the plan into action.

It’s important to note that financial planning services are not generally contractual. You’re free to cancel at any time without prejudice.


What does a financial planner do? 

A financial planner is an expert who can help you create a comprehensive plan to achieve your short and long-term financial goals. 

This usually involves budgeting, investing, tax planning, retirement planning, and more. They take a holistic approach to understanding your unique circumstances and objectives, then develop tailored strategies to help you make the most of your money.

Which is better – financial advisor or planner? 

There’s a fair bit of overlap between financial advisors and financial planners, but the key difference is the scope of their services. 

Financial planners tend to take a more comprehensive, long-term view, looking at your entire financial picture and developing a cohesive strategy. 

Financial advisors, on the other hand, are often more focused on specific products and investments.

Both can provide valuable guidance, but the best option depends on your individual needs. If you’re looking for broad, strategic advice to achieve your life goals, a financial planner is usually the better choice. 

If you’re primarily seeking investment management or product recommendations, a financial advisor may be more appropriate.

Is it worth paying for a financial planner? 

For many people, the value a skilled financial planner can provide far outweighs the cost. They can help you make the most of your money, optimise your tax situation, and give you valuable peace of mind about your financial future. Of course, the specific cost-benefit will depend on your individual circumstances and the complexity of your financial affairs.

How much should I pay for financial advice? 

Fees can vary quite a bit depending on the financial planner, the complexity of your situation, and the services provided. You can expect to pay an upfront fee for creating your comprehensive financial plan, typically in the range of £1,000 to £3,000.

Ongoing advice fees are usually charged as a percentage of your invested assets, typically between 0.5% to 1% per year. These fees cover things like regular portfolio reviews, rebalancing, tax planning, and general financial guidance and support.

It’s important to get a clear understanding of all the costs upfront, and to ensure the fees represent good value for the expertise and personalised service you receive. A reputable financial planner should be fully transparent about their pricing structure.