Retiring early takes dedication and commitment to save rather than the Yolo approach when you’re young. Our top tips for early retirement include the tax benefits of pensions, taking up your workplace pension and spreading your savings.
Before we begin, let’s not confuse the earliest you can retire with retirement age and access to pensions.
You can claim your State Pension when you reach your State Pension age, not before. Your State Pension age is calculated according to your gender and date of birth. You can find out yours by clicking here.
When you can take money from your personal or employer’s pension pots will depend on your pension scheme’s rules, but it’s usually after you turn 55. Your provider will be able to tell you exactly.
Other than these two constraints, you can retire as soon as you believe you have accumulated sufficient wealth to fund your lifestyle for as long as you’ll live. But for the purposes of this piece, we’re going to focus on how smart planning can make your retirement dreams a reality when you are young enough to enjoy them to the full.
The idea of early retirement is what many of our clients go to work for. Dreams of cruises, spending time with Grandchildren or turning a hobby into a lifestyle.
Whatever you have planned, it is going to cost money.
To give you an idea, a lump sum of £100,000 at 55 will give you an annual gross retirement income £3,706 on top of your state pension. That’s based on an annuity without a guarantee period and at a fixed level. Because annuity rates can differ so much it is essential to compare annuities to find one that will suit your requirements.
You get out what you put in
Retirement, as with so many things in life, is related to what you have contributed. Happy retirements are paid for by contributions over your working life. So it is important to start saving early.
To retire at 55 on a non index linked annual pension of £25,000, you and your employer will need to make a combined annual contribution of £1,600 from age 25 or £1,950 from age 30. This falls to £1,233 at 25 or £1,466 at 30 if you plan to retire at 60.
You don’t have to rely on your pension pot alone. You can make additional savings using your ISA allowance to build an additional revenue source. This is especially important if you are going to exceed your contribution limits.
You can read more about pension contribution limits by clicking here.
Make the most of your workplace scheme
Simply being in the pension scheme your employer offers, means a contribution from them and government in the form of tax relief. Not taking part is taking a pay cut.
Workplace pension schemes receive tax relief. Your contributions are treated as net, even if your employer collects them direct from your pay and passes them to the provider. The provider then claims the basic rate relief and adds it to your pension.
According to data collected by the Guardian since Auto enrolment launched in 2012, employees putting their money into one of the main workplace pension funds offered by the government’s pension provider, NEST, would have seen it go up in value by around 29%.
Although, past performance doesn’t guarantee future performance of course and three years’ data is not be long enough to judge, pensions are a long term investment, so you want your savings to grow.
Take the tax benefits
As well as its size, how long your pension pot lasts will depend on how you take it out.
You can withdraw a quarter of your pension tax free. Take more than that and it will be subject to income tax. So this is where we return to the value of ISAs.
Combining your income from your pension with your tax-free ISA savings, you can make the most of your allowances and basic-rate income tax band, avoiding higher and even basic-rate tax.
Plan your withdrawal
Of course how you plan to spend your savings is not just a matter of tax avoidance. You can make your money go further with a plan. Start by dividing your retirement into three practical periods so that your financial needs reduce with time.
The early phase will be based on making the most of your freedom for work. It is when you are healthy, active and will want to fulfill your dreams.
Your middle phase is based on your continued good health and may involve less travel. You may consider to spend the winter aboard and limit your activity.
Your later phase will be based on being less active and planning for poorer health.
Building a plan like this at the start can help you to retire earlier. Drawing lump sums from your pension, what we call income drawdown, in the early phase of your retirement can provide a higher immediate income. It has some risks, as you will need to ride out market volatility.
As you move to the later phase, you could consider saving money with an annuity purchase. As it will pay out for less time, that means more per year.
If your ambition is to retire from work as soon as you can, our advisers can help you with that. Even if you don’t need to make any immediate changes to the way you save. Contact us today for an initial consultation.
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.
Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.