Early Retirement

Early Retirement

The idea of retirement brings about lovely thoughts of spending more time with family, less work-related stress and taking up new hobbies, but it’s important to consider how early retirement will impact you and your savings. We take a look below.

WHAT IS EARLY RETIREMENT?

Early retirement is simply retiring before the official UK State Pension age which is currently 66 for both men and women. It is sensible to consider your situation and formulate a plan to ensure smooth financial sailing to – and through – retirement.

CAN I AFFORD TO RETIRE EARLY?

There are two main factors around affording to retire early

  • Lost time and money: If you retire early, you are sacrificing years of pension contributions, and your pension pot has less time to earn interest and grow in value before you start accessing the capital. This results in a smaller pension pot. 
  • Stretching your savings: Early retirement means you are going to be in retirement longer. You therefore need to have a large enough pot to cover these extra years or adjust the amount you will spend each year in retirement. 

Remember, your pensions have age restrictions around when you can access them. Therefore, if you want to retire before you can access your pensions you will need to rely on savings alone until your pensions are accessible.

HOW WILL EARLY RETIREMENT AFFECT MY PENSIONS?

Personal pension

  • You can access your personal pension savings from age 55, however this will change to 57 from 2028.
  • If you retire early, your personal pension will have less time to accumulate (translating to a smaller pension pot), and you will be drawing down the capital sooner. 

Workplace pension

There are two types of workplace pensions that your employer can choose to offer:

Defined contribution pension

This is where your employer pays a certain amount during your employment each year to build up your pension funds. 

  • You can access a defined contribution pension from age 55. If you joined your workplace pension scheme before 6th April 2006, you may be eligible to access it sooner.
  • Like a personal pension, if you retire early you will have less time to accumulate, and you will draw-down on the capital sooner. 

Defined benefit pension (aka final salary pension) 

This arrangement pays a defined amount calculated on your salary and how long you worked for your employer. 

  • The age you can access your defined benefit scheme depends on your provider, but it is usually 60 or 65.
  • If you retire early, it will reduce your annual pension because 1) you have worked with them for a shorter period than if you didn’t retire early, and 2) it has to account for the fact that it will be paid over a longer period.

State pension

  • You can access the state pension from age 66, but this is changing to 67 by 2028. Future increases to 68 are planned.
  • Unlike your personal and workplace pensions which you may access before the above retirement age, you cannot access your state pension early.
  • You need to contribute to National Insurance for 10 years to get the minimum amount of state pension, and 35 years to get the maximum. If you retire early, you may be limiting the amount of state pension you could receive when you reach state pension age. 

TRANSITIONING INTO RETIREMENT

Some workplace pensions allow you to reduce your hours and access part of your benefits. This means you can slowly start to transition to the retirement phase of your life. Hello more free time, goodbye full working week! 

There are a few things to consider in this approach:

  1. If you continue to receive a salary whist also receiving some pension income, you may exceed your personal tax allowance 
  2. If you access your pension whilst working, you may lose more of your pension to tax.
 

EARLY RETIREMENT DUE TO ILL HEALTH

You may be entitled to access benefits from your workplace or private pension if you are forced to retire early due to ill health. Every pension scheme differs in their definition of ill health, so you will need to discuss your situation with your provider.

If you experience serious ill health and have less than a year to live (and are under 75), you may be able to access all your pension at any age as a tax-free lump sum. However, some pension schemes keep half of your pension pot to provide to survivor’s pension for your spouse or partner. You should discuss with your provider what their policy is.

GETTING HELP

There is a lot to consider when looking to retire, and even more when thinking about retiring early. It is important you have a plan in place to achieve a secure retirement and ensure you funds don’t run out (read our article about Retirement Planning here). A Town Close Financial Adviser can help you see your financial situation clearly and help you put a plan in place so the retirement you dream of can become a reality. You can get in touch here.

What our clients say

“I had several pension schemes and other investments and wanted to consolidate them all in one place. Jeremy spent time reviewing my situation and my requirements and advised accordingly. I had several meetings with Jeremy and his team and agreed a financial plan. Jeremy wanted to ensure I was happy with his recommendations before any changes were made to my existing arrangements” – Essex client (Testimonial from Vouchedfor).

Great financial planning can change your life.

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