When planning for your retirement, one of the first decisions you need to make is your intended retirement age. You may choose to retire at State Pension age, but you don’t have to. State Pension age is currently 66, but there is a phased increase planned, to 67 in 2026, and up to 68 in 2028. Those choosing to retire before this age are said to have taken early retirement. In this article we’ll discuss reasons for taking early retirement and when you can draw your pension. We’ll also discuss how much pension you’ll need and how we can help you plan for early retirement.

Why might you consider taking early retirement?

There are many reasons you may choose to take early retirement, for example, if you are made redundant as you approach State Pension age, you may choose to retire instead of finding a new job. Health reasons may also fast-track your plan for retirement. Retirement may lessen the stress you are under, if caused by work, and give you more time to spend with friends and family.

How much pension do you need to fund an early retirement?

Before taking the leap into early retirement you need to consider your finances, and the type of retirement you’re hoping for. Pensions UK calculate annually the average income required for varying standards of retirement. This is known as the Retirement Living Standards. The figures shown in these standards are averages, and will differ depending on your location. However they are a useful indicator of the financial undertaking that early retirement may bring.

Your retirement income will usually come from a combination of the State Pension, workplace pensions, any privately held pensions and any other savings and investments you may have. Since 2012, employers have been required to auto-enrol eligible employees into workplace pensions. You can find out more about auto-enrolment in our recent blog post. Those who have worked for multiple employers in this time may have more than one workplace pension provider. If you have moved house or changed your name, but haven’t informed each pension provider, your pension may become ‘lost’.

Latest figures from Pensions UK show that 3.3 million pension pots are considered lost in the UK. These pensions have an average value of £9,470, which could make a huge difference to your retirement plans! This is especially the case if these smaller pots are compiled and invested wisely, giving you the possibility for greater income in retirement. Willday Wealth Management can help you track down your missing pensions. Simply complete our Get Started form, and we’ll contact the providers you have specified, on your behalf, and locate your pensions. We’ll then review and feedback to you on the findings and discuss next steps with you.

When can you draw your pension?

When you begin taking money from your pensions, this is known as drawdown. Different pensions have varying criteria on drawdown options. For your State Pension, you are only eligible to take it once you reach State Pension age, as mentioned above. Even if you choose to retire early, it will not be accessible until this time. You can check your state pension age here, on the government website.

State Pension currently equates to £230.25 per week for those eligible for the full amount. To receive this you must ensure you have sufficient qualifying years of National Insurance. At present, this is 35 years of National Insurance contributions. You can check the level of state pension you are eligible to receive, here. Retiring early may mean you have fewer years to make contributions, so this is important to check. If this is the case for you, you can opt to pay voluntary National Insurance contributions (NICs) known as class 3 NICs. This will boost your State Pension when you are eligible to draw it, and may not derail early retirement plans.

Any flexible pensions, personal or workplace, are limited by an access age of 55 years old, increasing to 57 in 2028. If you take any of your flexible pension benefits before this age you will be subject to an early withdrawal charge which is a 55% tax on the withdrawal. If you are a member of a defined benefit pension, your scheme will have a pre-determined ‘normal retirement date’, generally age 60 or 65. You can choose to initiate your income before this age, however the amount of income and tax-free cash you receive will be reduced as a result.

If you have significant ill health forcing you into early retirement, or life expectancy of less than a year, you may be able to take up to 100% of your pension fund as a lump sum. Some pension providers may allow this before the earliest withdrawal age, depending on your personal circumstances.

Things to consider in your early retirement plans

If you’re looking into the feasibility of retiring early, there are many considerations to take into account. As discussed, taking early retirement means less years of NICs for full State Pension eligibility. Additionally, you’ll have fewer years of contributing to workplace pensions. The pension pots you have built up will also need to fund your retirement over a greater number of years.

Pension pots are a long-term investment. The longer your funds are invested, the greater the opportunity they have to grow*. Withdrawing funds from your pension will also stifle the growth potential of the withdrawn funds.

Before making the decision to take early retirement, you must determine if it’s financially viable for you. Calculate your anticipated income and expenditure in retirement, based on the lifestyle you want. This will help you understand your income needs in retirement. If you’re planning to retire early, you can make changes now to ease financial pressures in retirement. Reducing regular outgoings such as credit card debt, mortgage or car payments, will leave more disposable income for you to invest towards your retirement now, to give you a greater level of retirement income.

Investing as much as possible in your private pension is also a sensible step. Retirement planning, no matter your intended retirement age, is essential. The earlier you make the plan, the longer you will have to build your pension pot. The larger your pension pot, the more feasible early retirement may be for you. Having an appropriate plan in place is essential to ensure you are financially secure in your retirement.

How can Willday Wealth Management help you plan for early retirement?

Our team will complete a thorough review of your circumstances to help ensure you’re making the right decisions, considering your needs both now and in the future. Take charge of your retirement today by opening a private pension with us. Get in touch to schedule a consultation with us, to ensure you are on track for the retirement you deserve.

Call us now on 0116 222 0119 or email hi@willdaywm.co.uk to get started!

*With investing, your capital is at risk and you may get less than what you invested.