The normal minimum pension age – when you can access your pensions without incurring an unauthorised payments tax charge – is currently 55 and set to increase to 57 on 6 April 2028 to reflect increases in the state pension age. If you haven’t reached 55 by 2028 then you will have to wait another two years before being able to access your pension. There may be further increases in future.
But what if you want to retire now? At Continuum we are looking at how much you need in your pension pot to take the early retirement option.
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Anyone with a pension pot can access it in the way they wish from the age of 55. However, although being able to get at your money is tempting, it may not be the shrewdest way to prepare for your future. It’s usually good practice to pay into your pension pot for as long as possible, allowing it to grow as large as it can before cashing in any of it. For most people, therefore, retirement will usually come in their mid-60s.
But what if poor health, or simply having had enough of work means that you want to take early retirement at 55? How much would you need to save?
How much retirement income will I need?
According to the Pensions and Lifetime Savings Association, a single person would need an income of £10,200 to live a “minimum level” lifestyle in retirement, which is slightly more than the current maximum new State Pension of just over £9,339 a year. To live comfortably, rather than meagrely, you might need £17,818 a year. If you are a couple, or don’t own your own home, you will need to aim for a higher income.
But we are all different, and a working life spent as a high earner would probably mean that this income would fall rather short of your real needs.
An alternative way to way to estimate the retirement income you might need is the 70 % rule. This suggests you need 70% of your working income to maintain the lifestyle you want in retirement. So, if you retire on a salary of £50,000 you would be looking at achieving an income of around £35,000.
Remember your retirement lifestyle will change. Early in retirement you may want to spend more, travelling and enjoying your new found freedom. As years go by you may feel less active and spend less – but then you may need expensive long-term care. You will also need to consider inflation. In the past 30 years, purchasing power has almost halved – £1 in 2021 can buy only as much as 50 pence could in 1991. Retiring at 55 might mean being on a pension for 25 years, so you’d need to factor in the effects of inflation.
Do you have a large enough pension pot?
The average UK pension pot after a lifetime of saving stands at £61,897. With current annuity rates, this would buy you an income of only around £3,000 extra per year from 67, Added to the maximum State Pension, makes just over £12,000 a year, just enough for a basic retirement lifestyle.
But if you want to retire early, you will be waiting years for the state pension entitlement to start. You will need to have a much larger pot. That figure of £35,000 a year might need a pension pot of close to £700,000 if you use an annuity to turn it into income.
An annuity is a guaranteed income for life. The amount is usually fixed, though you can have one that rises to help beat inflation. It can never run out, no matter how long you live, but returns may be small – especially if you are retiring early. The alternative is drawdown where your pension pot remains invested in the stock market, and you draw on it as needed. You can take varying amounts, and if there is money left when you die, leave it to your dependants – but you need to be aware that you could run out of money before you run out of time to spend it.
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The size of pension pot you need for an early retirement being spent in comfort may sound out of reach, but at Continuum we can work with you to find solutions. A large pot is a possibility if you start young enough, giving yourself time to make sufficient contributions, and your contributions enough time to grow. Planning how you use that pot will also be key to success, and again there may be possibilities to make your money work harder for you.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.