Life after work
Plan for the future you want
Early retirement is no longer defined as the moment when you stop working forever. For many people, it’s simply the moment when you no longer have to work for money. But this also means being in a financial position to choose to keep working if you enjoy what you’re doing.
Retiring at 55 is an attainable target if you start early and develop a sound financial plan. It’s worth remembering there’s a big difference doing work you love or a job that you could leave if you get tired of it, because you have the financial freedom and flexibility that saving up enough money can give you.
Lifestyle and spending habits
So the question is, ‘How do you know how much money is enough to last through your golden years if you want to retire early?’ The answer is a highly personal one and depends on your lifestyle and spending habits.
For many people, early retirement means being able to make the shift from work they have to do to work they want to do. Taking an early retirement appeals to many people unsurprisingly, but making it a reality requires careful consideration and a well-thought-out approach to retirement planning.
Maximising your income
Working towards an early retirement strategy is built on maximising your income – how much money you’re making; expenses – how much money you’re spending; and saving – how much money you’re saving and investing.
Can you access the State Pension, the pension you receive from the state? The answer is ‘no’ if you want to retire early; the age at which you can receive your State Pension is changing for both men and women depending on when you were born.
Your State Pension will not be available to claim at 55, so do not include this when working out your income for the first part of your retirement. In the UK, the State Pension age will rise for both men and women until it reaches 66 in October this year and 67 between 2026 and 2028. However, 46% of UK workers, according to research, who are currently aged 55 and over say they feel under-prepared for their retirement.
For some people who want to wave goodbye to the 9 to 5 grind and retire early, it may seem like a pipe dream. The good news is that you can usually access private pensions from the age of 55, which makes it an age often associated with retirement. However, retiring early may affect both your private or company pension.
Assets to produce income
The rules for private and company pensions vary, depending on who provides them. We can help you to check this to see how early retirement could affect your own situation. But if you do intend to retire at 55, you will need your assets to produce income for a longer period than someone who retires later.
It means developing an accurate projection of what you think you will spend each year. Then you can compare that to the sources of retirement income you think you’ll have available to you.
Opportunity to grow
The benefit of starting a pension early on and contributing to it regularly means you’re able to take advantage of the compounding effect. Compound interest causes your wealth to snowball and allows you to earn interest on top of both your savings and existing interest, and it accumulates over time, meaning the longer you save, the more your pension has the opportunity to grow.
It makes a sum of money grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns at the end of every compounding period, which could be daily, monthly, quarterly or annually.
If you’re looking to retire at 55, you’re much more likely to have the comfortable retirement you dream of if you started saving for it early in adult life. Otherwise, you may wish to increase the contributions into your pension pot so you can meet the level of income you will need for a comfortable lifestyle.
So how much will you need when you retire? One way of estimating how much you’ll need is by referring to the widely used ’70%’ rule, which states that you’ll require 70% of your working income to maintain the same level lifestyle.
Whilst this gives you a good idea of the amount you’ll require when considering retirement, you may find that you’ll need more or less. You should consider what you plan to do in retirement and account for unexpected costs, such as long-term care, as these will need to be factored in to help you estimate your retirement costs.
Creating an overall budget and living costs as well as other expenditure you’d like to plan for, such as holidays, will further help you reach a more realistic retirement target figure. If you’re planning to retire early, your money will need to last longer, therefore it’s important to account for the extra years.
Pension tax relief
The Government automatically adds basic-rate tax relief of 20% to pension contributions. If you pay tax at the higher rate, the tax relief percentage increases to up to 45%, depending on your income. It’s important to double check that you’re claiming pension tax relief. If you have a personal pension, and you’re a higher or additional-rate taxpayer, you will need to complete a self-assessment tax return to receive the extra relief due.
It’s worth bearing in mind that the annual allowance gives you £40,000 as the maximum amount you can pay into your pension(s) each year and get tax relief on. It’s possible to use ‘carry forward’ to reduce your tax charge if you go over the annual allowance limit by carrying forward unused annual allowances from the last three years. There are conditions to using carry forward that need to be met, and pensions rules can change.
When and how you can withdraw from a pension will depend on the type of pension you have, your personal circumstances and your retirement goals. At 55, you can choose to take your pension as a lump sum (once or periodically), as an income (an annuity that provides guaranteed income) or as a mix of both.
How you choose to draw your income is up to you, with 25% available as a tax-free lump sum, and the rest taxed. Withdrawing your income is a crucial decision that you often cannot go back on once it’s made, so be sure to only make your choices after weighing up your options carefully.
 2019 Close Brothers Financial Wellbeing Index – https://www.finder.com/uk/pension-statistics
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.
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. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.
PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. 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.