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taking early retirement

Early Retirement – Everything You Need to Know About Taking

Retiring early can be a long and confusing process. Many of us will find ourselves in a situation where we need to access our pension benefits early.  

We are here to provide all the necessary information so that you can decide if early retirement is for you.

Your Questions On Early Retirement Answered

This article aims to answer 11 important questions about early retirement.

The main topics in this guide will cover:

  • What is early retirement – we define ‘early retirement’ and outline the basics 
  • How to retire early – we outline the factors you should consider when making your decision
  • Eligibility for early retirement – we help you calculate your retirement date and highlight  
  • Can you retire at 55 – We highlight the options available to you
  • The pros and cons of early retirement – we evaluate the advantages and disadvantages so that you can come to the right conclusion

1 – What is early retirement?

Early retirement is when a person stops working before they have reached the statutory retirement age. This could be through taking a company pension, private pension, annuity or pension drawdown

But early retirement is subjective. It depends on how you envision it for yourself. 

It can offer a new start and does not have to mark an end to earning an income. 

Before we begin, here is a short video from the Department of Work and Pensions (DWP) to explain the basics:

2 – At what age can I take early retirement?

In the UK, you can opt to access your pension benefits and use them to gain income from age 65 onwards. 

If you retire before you reach this age, it is classed as early retirement. This also includes taking ill-health retirement. 

3 – How do I retire early? What do I need to consider?

 The first thing to consider when planning early retirement is can you afford to do so. Are all your withstanding debts paid off and do you have sufficient savings in place?

1)  Calculate your income

You will need to calculate your income which can be quite complicated after early retirement. It may no longer consist of a single payment. 

You will need to consider:

  • Savings You will need to calculate your total savings and decide whether you have enough to cover your predicted annual expenses.
  • Pensions You may have several pensions in place and should request a forecast from each of the ones you wish to start using early. 
  • Annuities These are insurance contracts. In return for a lump sum payment, usually from your pension savings, insurance companies can provide you with an annual income for the rest of your life. For more information about annuities, please read here.
  • Early retirement benefits Certain jobs may offer incentives in their workplace pension plans. You should also check this through with your employer as it may affect your income during retirement. 
  • Pay from any part-time work You may begin working elsewhere once you have taken early retirement and should also include this income in your calculations.

semi retirement

2)  Calculate your predicted financial expenditure

You will also need to calculate your predicted financial expenditure and any monetary commitments you might have: 

  •  Lifestyle costs – You will need to think about how you plan to live during your retirement. For example, if you are planning to do a lot of travelling, you should think about how financially feasible this will be.
  • Loss of workplace benefits – Some employers offer incentives such as healthcare packages, a company car or various forms of paid leave. You will need to consider how losing these benefits will affect your finances. 
  • Spending patterns – For example, you may end up saving the money you would have spent on commuting to work but your household bills may increase. You should try to account for the impact of this on your disposable income. 

3)    State Pension

You will also need to think about when you will be able to access your State Pension.

4)    Private or Company Pension

Decide how you are going to manage your private or company pension funds. Will you opt to access your entire defined contribution pension?  Your pension is taxable although you will be able to take out 25% of your funds tax-free.

5)   What will you do in retirement

Finally, you will need to consider how you would like to reach early retirement. In other words, do you intend to keep working part-time and retire more gradually? 

4 – What is the State Pension? 

The State Pension is a payment from the government. You will receive it in regular installments once you reach the statutory retirement age.  

How much you get is determined by your National Insurance record. The greater your National Insurance Contributions, the more eligible you will be for the full amount of State Pension. 

Not everyone will be eligible for the same amount, but you can check this online. 

Currently, the full amount of State Pension stands at £168.60 a week or approximately £8,750 per annum. 

This video provides a simple outline of what you need to know. Please watch below:

5 – Can I retire at 60 and claim State Pension? 

The statutory retirement age is the age that you can receive your State Pension. In the UK this officially stands at 65 for both men and women in 2019. 

You will only be able to claim your private and company pensions before you reach this age, not your State Pension.

In addition, the statutory retirement age is currently on the rise. In 2017, both men and women could retire at age 62 and claim State Pension. 

Now, however, the government has planned to increase the age to 66 by 2020, then 67 between 2026 and 2028. 

The statutory retirement age also depends on the year you were born.

You can request an official State Pension forecast at any time. This will tell you the amount you are eligible for, what you can do to increase this amount, and the age you can receive it. 

In the meantime, please use this retirement date calculator to work out when you will be able to claim your State Pension. 

6 – Can you get your State Pension early?

In short, the answer is no. You cannot gain access to your State Pension before you reach the statutory retirement age. 

Even if you retire for reasons of ill health, taking State Pension early is not an option. However, there may be some other forms of financial aid available in this situation to help with living costs.  

State benefits include Statutory Sick Pay (SSP), Universal Credit (UC) and Employment and Support Allowance (ESA). You can find out if you are eligible for these benefits at www.gov.uk/benefits-calculators. 

7 – When do I stop paying National Insurance if I retire early?

If you are working, you will have to pay National Insurance Contributions until you reach the statutory retirement age. If you continue to work after you hit this State Pension age you will not have to pay National Insurance anymore, but you will still have to pay income tax. 

Michael Cracknell, chief executive of the Pensions Advisory Service, explains that:  

  •  To receive the full State Pension, you need to have made National Insurance Contributions for at least 35 years
  •   In some situations, you are able to claim National Insurance Contribution credits if you have been out of work for a period of time. For example, if you were raising a family or caring for someone.
  •  You may receive a lower State Pension if you have not accrued 35 years of National Insurance Contributions
  •  It is advisable to get a pension statement to view the total years you have contributed National Insurance and get a forecast for what your State Pension will be

You can apply for a forecast at Gov.uk/checkstate- pension.

early retirement benefits

8 – Can I retire early and continue to work? 

Yes, this is an option you should also consider. You may even find that early retirement presents new job opportunities, particularly for part-time work. 

You can decide whether you would prefer immediate retirement or phased retirement.

Phased retirement, or semi-retirement, may involve continuing work and retiring gradually. You may be able to access part of your company pension this way or access your company pension and look for a part-time job elsewhere. 

9 – Can I retire at 55?

There is no rule to say you cannot retire at 55. However, if you do retire at this age you will not be able to gain access to your private or state pensions. 

Mark Devlin, a retirement expert at Prudential, explains that no matter how prepared you are, it is incredibly challenging to retire before 55. 

He says: “Private pensions can’t be drawn till age 55 at the earliest, so resources from elsewhere will need to fund the early years of not working.”

Despite this, retiring at 55 is possible in some cases:

  • Certain schemes may be available to you that will allow you to retire before 65. However, these are most commonly offered to people who began work at an early age (usually in the military or civil service). 
  • Workers with access to these schemes may still receive full pension and health benefits even though they have not yet reached 65. 
  • The schemes available are dependent on the industry in which you work. You should contact your scheme provider if you believe you are entitled to do this. 
  • Some people believe you can retire even earlier than this if you follow a strict financial plan and save efficiently enough. 
  • Recently there has been a growing interest in the FIRE movement (Financial Independence, Retire Early). 
  • For instance, The Guardian reported in August 2019 that many millennials are being encouraged to save and aim for retirement at age 40. You can read the article here.

Whichever way you look at it, being ready to retire at 55 takes a lot of financial discipline, and extensive long-term planning. 

10 – How much do I need to have saved to retire at 60 in the UK?

When planning to retire early, it is recommended that you aim to have a minimum of 25 to 30 times your predicted annual expenses saved. 

It is advisable that you save 15% of your income from the age of 30 to make retirement at 60 a realistic target. The later you start saving, the more difficult achieving this goal will be.  

The amount you need to save for retirement depends on the age you will retire – and therefore how many years you need these savings to last. You will also need to think about the expenses you will have to cover.

There is a range of retirement income calculators available that can give you an idea of how much you will need to save. Alternatively, you should speak to a financial advisor about this for more specialised advice. 

The AVIVA Retirement Planner is a great tool to get started. 

11 – The pros and cons of early retirement

There are many advantages and disadvantages to early retirement. With the benefits come opportunity costs.

You should consider them all thoroughly before coming to any final decision.  

Advantages of early retirement

  •  Offers a change of lifestyle Many who choose early retirement can begin a fresh new start. Early retirement can provide an opportunity for new experiences, whether this is through new part-time work or increased leisure time.
  • Opportunity to travel Many retirement plans include some form of travel. Retiring early can offer a chance to do this sooner and for longer. 
  • Financial independence It can feel good to not have to work for your income anymore and if you have saved wisely, early retirement can be a great success.
  • Health benefits Retiring early may relieve any strain on your health that is being heightened by your job, physically and mentally.   

Disadvantages of early retirement

  •  A smaller pension pot This is because you have paid into your pension for less time. Your savings may not be as great as someone who has worked and saved until normal retirement age. 
  • No access to State Pension straight away Although you can access your workplace pension at 55, you will still have to wait until 60 to access your State Pension.
  •  Takes time and discipline Preparing for early retirement takes much more financial self-restriction and long-term planning. 
  • Changes to healthcare coverage Leaving work early may lead to the cancellation of private healthcare packages included in various employment contracts. 

Final Thoughts

Early retirement planning is a life-changing process. This article hopes to have provided the necessary information about the options available so that you can begin making your decision. 

If you require further advice, you can arrange this through an independent financial advisor or by contacting the Pension Advisory Service.