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.
This article aims to answer 11 important questions about early retirement.
The main topics in this guide will cover:
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:
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.
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?
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:
You will also need to calculate your predicted financial expenditure and any monetary commitments you might have:
You will also need to think about when you will be able to access your State 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.
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?
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:
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.
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.
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:
You can apply for a forecast at Gov.uk/checkstate- pension.
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.
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:
Whichever way you look at it, being ready to retire at 55 takes a lot of financial discipline, and extensive long-term planning.
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.
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.
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.