Early retirement explored

More than half of retirees are retiring earlier than planned. The top reasons being to make the most of their time, look after grandchildren or because they no longer wish to commute for work.

Increasingly, people aren’t stopping work altogether. But early retirement describes the point where they’re financially independent.

You might be considering early retirement because:

• You can afford to
• You’re being made redundant or want to leave your job
• You’re hoping to do a different type of work
• You want to spend more time with loved ones
• You don’t want to wish you’d retired earlier

For many, the desire to do and see certain things while they’re still fit and able may also be a particular driver for early retirement.

Having a clear idea of what you need to live on can give you a better idea of what you’ll need to save for retirement.

Saving into a pension in the UK is very tax efficient as you benefit from tax relief based on the rate of income tax you pay. For example, if you earn £50,000 and want to boost your pension savings by £7,000, with 40% tax relief - worth £2,800, the cost to you would be just £4,200.

If you have a workplace pension, you could also take advantage of any matching contribution from your employer. An increase in payments, even by 1%, could make a huge difference to your overall pension pot - especially if you start early.

With ISA savings, there’s no age restriction on when you can access them. So they could be key to making early retirement a reality.

ISAs can also be particularly useful because, unlike income from a pension, you won’t pay tax on any money you take from them.

Early retirement usually describes leaving your job or career before state pension age.

The earliest age you can currently receive your state pension is 66 in the UK. With most personal or workplace pensions, the earliest you can usually start to take an income is 55. But be aware that future age increases are planned for both the state pension and personal/workplace pensions.

If you’re planning on retiring at a particular age, make sure your pension provider knows. This way, they may make suggestions if it looks like your pension investments aren’t aligned with your plans.

The general rule of thumb is to move your pension savings into lower risk investments as you get closer to taking money from them. This can help reduce the impact of any significant market ups and downs, although you should remember that the value of all investments can go down as well as up, and you could get back less than you paid in.

Choosing the right investment approach can be complicated. If you're not sure where you should invest your pension, our financial planning specialists can help.

Before you retire, there are a couple of things to do if you can:

• Pay off debts – interest on debt is usually significantly higher than interest on savings. So focus on getting rid of debt before building your retirement savings, or retiring.
• Pay off your mortgage – if you can afford to overpay your mortgage, it may help you retire sooner. You could also pay less in total.

While there are a lot of upsides to early retirement, one of the downsides is that you won’t have as much time to save or build up your retirement savings. They’ll also need to last longer. That means you might need to live on a lower income than you expected and your money could run out, leaving you with the state pension alone.

Choosing to retire at 60, the most popular age to retire, gives an additional six years of retirement without the benefit of the valuable state pension (worth nearly £10,000 a year).

It’s also an extra six years’ spending, six years’ ‘lost’ retirement saving, and six years without the additional interest or growth that your retirement savings could earn.

You may be able to take money from your pension before age 55 if you’re retiring early due to ill health. The payments you receive may also be higher depending on your illness.

If your life expectancy is less than a year, it may be possible to take your entire pension pot as a tax-free lump sum. To do this, you need to have less than the lifetime allowance in pension savings (currently £1,073,100).

Bear in mind that some pension providers automatically hold half of your pension pot back for a spouse or partner. So if you need to retire early due to ill-health, speak to your pension provider to find out what’s possible.

If you’ve had multiple jobs, keeping track of all your pensions and what’s in them can be tricky. But even smaller pensions can make a big difference to whether you can afford to retire early. You can find lost pensions through the Government’s pension tracing service.

Make sure you consider all your possible sources of retirement income – not just your pensions. Your overall income could come from:

• Pension(s)
• ISA or cash savings
• Work in retirement
• Money from downsizing
• Money from inheritance
• Rental income
• State pension (although if you’re retiring early, this won’t be available at first)

If you have a partner, planning retirement together may also make a positive difference to whether you can retire early.