What to think about before you plan to retire early.
At some point, you will want to put an end to the part of your life where you work in return for a salary, and instead, start to spend that money on enjoying your life.
A key part of getting ready for your retirement is planning ahead to see when you can retire and to help give you guidance today on what you can do to improve your future. This may be putting more money away to deliver a better retirement, knowing when you can safely retire or just having peace of mind that your future is planned out and you are doing everything you can to prepare.
Being proactive with thinking about your retirement will help you answer questions such as:
Above and beyond making sure that your essential spending is met from your pension income, the choice of when to start your retirement is a personal one. It’s important to remember that your retirement does not have to begin at the same time as any pensions you may have, even the state pension! There is no longer a State Retirement Age, just a State Pension Age.
Whilst you are able to stop working at any point, the trade-off will often be that the earlier you retire, the lower your income in retirement will be.
Knowing what it will look like in terms of pension income at different retirement ages can be very useful in making this key decision. Working out what your pensions are likely to pay out at certain ages, and how different contribution levels between now and then are likely to impact your retirement will be vital in working out both when you can retire and how much you will have.
It may be worth looking at certain specific ages, such as when a key pension begins payment, or when your pension pot is due to reach a certain size. It is also important to remember to factor in the risk that things may not go as expected or as they have been over recent years or decades.
Making sure you have enough money to retire on is a key part of working out if you can retire early. Key questions to ask include:
When considering the question ‘Have I got enough to retire?’, it’s important to ask ‘enough for what?’. How much will you need to deliver the lifestyle you want?
The length of time of your retirement is something that also needs to be considered. The last thing you want to happen is to run out of money and then need to pay for a care home, make significant additions to your home if you have mobility issues or any other specific needs.
The more you save and the longer you wait will generally lead to higher levels of retirement income.
No matter how long is left before you plan to start your retirement, there are things you can do to help boost your retirement income.
Quite simply one of the easiest ways to boost your income is to keep building up your pension pot. Money set aside now will still have time to grow and compound which should lead to gains, and hopefully you end up with a larger pension pot than what you put in.
Deferring your retirement not only gives your pension pot longer to grow, but it also means that you will have less time drawing it down, meaning you are able to regularly withdraw more. Some pension schemes (including the State Pension) also increase your pension payment if you defer.
Effective financial planning can be used to help reduce your tax liability, mainly by planning when withdrawals are made and where from and taking advantage of the many tax reliefs that the government offers to savers.
If you are happy to keep your money locked away for the long term and understand and accept the risks involved, then investing can often be a way to help boost the growth of your pension pot or other retirement savings over time.
Retirement doesn’t have to mean completely stopping work. With the help of a flexible retirement plan, it’s possible to reduce working hours for a period of time to step into retirement with a phased retirement. This may allow you to get used to retired life, start to enjoy retirement with a lower cost impact or even take a more enjoyable job at a lower salary for a time.
Currently, most private pensions can be accessed from age 55. Although this is due to increase to age 57 from 6 April 2028 (to match the rise in State Pension age).
Your State Pension Age (the earliest you can claim your State Pension) will depend on when you were born. There are some changes to the State Pension Age at the moment. For people reaching State Pension Age now, it will be age 66 for women and men. For those born after 5 April 1960, there will be a phased increase in the State Pension age to 67, and eventually 68.
You are able to access a Cash or Investment ISA at any point. Lifetime ISA’s can only be accessed penalty-free at age 60 (unless used to purchase a qualifying property). Please find more in our article about the different type of ISAs.
The main purpose of your pension is to provide for yourself and your family in retirement. With life expectancy increasing you can expect to live for many years after you stop working. The lifestyle you can afford to live will be largely defined by the size of your retirement savings although in many cases the length of your retirement will also pay a large part.
Life expectancy in the UK has drastically increased over the past few decades. For example, as per the latest ONS on longevity, over the last 50 years, life expectancy from birth has increased by 11 years for males and 8 years for females; with life expectancy at birth in the UK at 79.0 years for males and 82.9 years for females (based on latest 2020 date). This means that you are likely to have several decades, and potentially as much as 30 or 40 years in retirement. As such it is very important to make sure you have enough funds set aside to sustain you over your retirement years.
Although not necessarily recommending it as part of your retirement planning you should be aware of the possibility of releasing some of the equity in your home.
Equity Release and Lifetime Mortgage products both allow a person to access the equity in their home. In both cases repayment is effectively only made upon death or when the home is vacated (for example upon entering care). Whilst we are not recommending you take on additional debt or liabilities, it is useful to note that the equity that can be released from your home is a potential future income if you may need it. For more information on both lifetime mortgages and equity release products please visit our dedicated page on equity release and lifetime mortgages to find out more and see if they are for you.
Another important consideration when thinking about retirement is the cost of care – whether that’s support to continue living independently in your own home in later years or in residential care. Currently, most people are liable for all or most of their later-life care costs (unless they have a low level of assets) and this can be very costly.
You have worked hard during your life to earn enough money to enjoy your retirement. You don’t want to be just getting by in retirement, you want to make sure that you are enjoying your later years. This means thinking carefully about everything from the basics, such as food and accommodation, to more luxurious spending such as holidays and hobbies, and pastimes that interest you.
It is a big shift in a person’s life, moving from a lifetime of working into one of retirement. You need to make sure that you are not only financially ready but mentally prepared as well. Stopping going to work every day after decades of doing so can be a big change.
Why is it so important to forecast how much you are likely to have in retirement?
One of the most important benefits of planning for your retirement is gaining confidence that you will have enough money to last you as long as you need, and with that one of the biggest risks is running out of money too soon.
As such making a plan of how much you will be putting away, how fast it will grow and how much you will end up with and need are all things that need to be forecast.
Your current pension pot will continue to grow over the remaining years until retirement, with additional contributions being made and these contributions also growing over time. How much this will grow to by the time you are ready to start drawing on your pension relies on several assumptions, mainly around the performance/growth rate of the assets in your pension. You should make sure when forecasting growth that you do not use too generous assumptions as this may increase the risk that you get less than you expect at pension age.
There are also tax implications to consider, both when withdrawing from your pension and when contributing. Special care needs to be taken when withdrawing to not end up with a large tax bill.
One of the most difficult parts of planning for your retirement is knowing what your plan end date is. Planning for your retirement naturally involves working with a large number of uncertain or unknown assumptions. One of the key assumptions which we are unsure of is the length of the plan, because very few of us can be certain of when we will die.
It can be confusing trying to work out if you have enough to retire. There are so many variables such as life expectancy, lifestyle expectations and planning for the unexpected like ill health or residential care. There’s often also the confusion of having multiple pension schemes, which can make it hard to work out how big your pension pot actually is. It’s no wonder people often put off their retirement planning. However, a robust and accurate plan and forecast is the best way to ensure that you can see how and when you can retire early and if not what you need to do to get there.
If you feel like you may need the assistance of a professional to help work out an accurate and robust plan then it may be worth getting in touch with a financial planner. A financial planner is a type of financial adviser that specialises in building long term planning, often with a focus on pensions and retirement.
To retire earlier than planned you may not only need to review if you’re saving enough but if your pension is in the right place. Both in terms of giving you the most growth and also if you will able to access the pension when you want and how you want.
This may involve opening up a new pension or ISA and possibly transferring current pensions and ISA’s. Although it is certainly not always beneficial to transfer a pension, it often can be and the option is worth exploring. Please read out article on pension consolidation if you’d like to find out more about the potential benefits of pension consolidation.
Before working out what the best way of growing and accessing your pension is, it’s important to know what you currently have. The first step is to figure out what type of pension(s) you have and what options you have to access them and how.
Basically, there are two different types of pension schemes in the UK: Defined Benefit and Defined Contribution.
Which one you have can affect what you can do with it, so it’s worth bearing that in mind.
A Defined Benefit pension is also known as a final salary or a career average pension and provides a guaranteed income for life, from a certain age.
Your length of service in the scheme, salary levels whilst in the scheme, and the scheme rules will determine how much you get in retirement.
With a Defined Contribution pension, you and/or your employer will pay money into a pension pot. This money is usually invested and will hopefully grow over time.
There are a large number of Defined Contribution pension schemes in the UK, all with their own fees and features. They are generally quite flexible in how much can be paid in and when you can withdraw There will also often be a choice of investments.
It is also possible to transfer and consolidate defined contribution pension schemes from old employers.
Pension consolidation is a way to help keep track of your pension money by putting it in one pot and focusing on managing it for the best growth possible.
There are advantages and disadvantages to consolidating your pensions. Please find out more in our article on Pension Consolidation.
Many people can retire a lot earlier than they think. The recent changes to pension rules (Pension Freedoms) have given a lot more flexibility to how pensions are accessed and used, allowing a lot more choice in when you can start your retirement.
However, there are some risks to be aware of when it comes to retiring early, the main one being the risk of running out of money before you expect it. This is why having a good plan for your retirement and a good understanding of your pensions (and making sure they’re in the best place) is key.
A sensible first step in working out when you can safely retire is to talk to a pension adviser or a financial adviser that covers pensions and retirement planning. They can help to answer those key retirement questions such as; how much you need to save for retirement, when you can afford to stop working and how much you can spend in retirement.
It is never too early to start thinking about your retirement, and taking action early often leads to a better retirement. Many Independent Financial Advisers, such as ourselves, offer a free consultation which can be useful to not only see how much pension advice is and what it can do, and to help get an understanding of your current situation and what options you have. An adviser will be able to assess your situation and create a retirement plan to help you understand how long your money will last, removing any fear of running out of money in retirement.
Make sure you choose an adviser that’s regulated by the Financial Conduct Authority and understand the difference between a restricted and independent adviser.
So, if you’re looking to retire early, then it’s never too early to start. If you’d like to speak to an Independent Financial Adviser about pensions and early retirement, then please get in touch. We are always happy to talk, with no obligation.