Not all of us want, or need, to stick to the 9-5 routine for ever.
State retirement age, when we are entitled to start drawing our state pension is now 66 for new retirees, but there is no longer a compulsory retirement age. So, as well as the choice of working into our 70s, if we want to and can afford it, we can retire in our 50s.
The government will legislate in the Finance Bill to increase the normal minimum pension age from 55 to 57 on 6 April 2028. But at Continuum we are looking at the possibilities of early retirement now and what you can currently do with your pension when you turn 55.
Can you afford to retire?
For most of us, the question of when to retire may come down to when we can afford it. With the mortgage paid off and the children in homes of their own, we may find that we don’t need to spend as much and that a smaller income will be adequate.
You will not be able to claim your state pension until you reach state pension age. For both men and women, this is currently 66 and scheduled to rise to 67 between 2026 and 2028.
If you are going to retire before that date, you will need to have sufficient funds in your employer’s pension or your own private pension pot. Remember, you need 35 years’ worth of National Insurance contributions to get the full state pension
Exactly how much you will need as a retirement income may depend on you. Many people find that around half to two thirds of the money they had coming in when they were working is adequate, but it is essential to do your sums before you take the decision to become a man or woman of leisure.
Will your scheme let you?
Most private pension schemes will allow you to retire early and most if not all employers pension schemes may do the same.
However, because you have had less time to put money into your pension and because it has less time to grow, the pension pot that you build up will probably be smaller if you retire early.
It is therefore vital to plan exactly how you will use your pension pot and since pension freedoms were introduced back in 2016, there is actually a lot of choices that you can make.
You can leave your pension pot untouched. You can access your pension funds if you wish, but you do not have to. If you don’t need to draw any money out straight away, perhaps because you have income from another source, such as part time work or investments you can leave your cash where it can (hopefully) continue to grow.
You can buy a guaranteed income with an annuity. You can buy an annuity, which is a guaranteed income for the rest of your life. However, you need to be careful. Retiring early may mean providers will offer a lower annuity rate and a longer retirement may mean many extra years of inflation, which can make an annuity income that seemed generous at 55 look far less adequate at 86.
You can take out a lump sum. You can take up to 25% of your pension pot as a tax-free cash sum. You can also cash in the whole pot at once, but you will need to consider what you will live on in retirement and how much tax you will pay in the process.
You can start drawing down. Drawing down basically means taking your cash in chunks as you need it while leaving the rest invested could also be a solution. With the right level of withdrawals, you might be able to have the income you need while the remainder grows in value.
What choice is right for you?
You will probably be hoping for a long and comfortable retirement, which can demand a large pension pot. Fortunately, with some forward planning and expert help, it may be possible to retire early by making your pension pot work harder. At Continuum we can provide the expertise you need, look at ways to make your pension savings work for you, and may be able to help you hit your retirement income targets – while staying clear of scams and tax pitfalls.
At Continuum we can help you look at your pension arrangements as part of a full pension review that leaves you a great deal better off – and your future a great deal brighter whether or not it includes retiring early.
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.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.
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.
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