Be it the pull of your bare feet sinking into the warm, white sands of the tropics or the push to (finally) renovate the kitchen and rescue it from the clutches of near disaster, you may be exploring how to retire early.
From early pension withdrawals to figuring out the steps and ways to retire early, it can be equal parts exciting and overwhelming to think about early retirement.
Why consider retiring early?
Leaving morning commutes in the rear-view mirror and driving towards adventure with friends and family can be appealing, but it’s worth working out why you’d like to retire early and what that would look like.
This also means recognising what ‘retirement’ and ‘early’ means for you. ‘Retirement’ traditionally means no longer having to work, but maybe you’d like to keep working in a different capacity. But it may also look like taking your pension benefits while carrying on working in your current job, either with the same hours or reduced. Or it could see you volunteering your time and experience in an area that is meaningful. Often, it means financial independence or no longer having to rely on work to receive an income.
And ‘early’ could mean anything from a few years to a decade before the State Pension age. Currently, you have to wait until you’re 66 to get your State Pension. But you can start taking money out of your workplace and private pensions from the age of 55 (or 57 from April 2028). So, whether that’s because you don’t like your job, looking to change your lifestyle or think it may be best for your health, your thoughts may drift towards the idea of early retirement.
And when that happens, have a pen and paper nearby (or spreadsheet if you’re feeling fancy) to start sketching out your vision with a few thought starters:
This exercise can begin outlining your dreams so that you can begin puzzling together the pieces for your financial future. And to build on this activity, with more detail and organisation, check out our Shape my Future tool to help you daydream about the lifestyle you might like to have in the future.
Early pension withdrawal
Early pension withdrawal, also known as 'pension unlocking' means withdrawing money from your pension before reaching the age of 55. And tempting as it may be, withdrawing money from your pension before turning 55, isn't recommended for two reasons:
- you'll be charged up to 55% tax on the amount you withdraw, which could severely impact how much of your pension you'll receive. You could be at higher risk of running out of money before you retire and have to work longer to save more. Also, most pension scheme rules don't allow these kind of payments.
- you could be the target of a scam. Some third-party companies claim they can take advantage of loopholes so you can get your pension withdrawal and will charge up to 30% for the privilege. However, they’re often pension scams. So, on top of paying the 55% tax charge and their 30% fee, you’d only have 15% of your pension to play with. And it's worth noting that if you're the pension scheme itself, as you would be with a Small Self-Administered Pension Scheme or SSAS, HMRC will impose a scheme sanction charge of at least 15%, which could leave you with £0.
The two exceptions for withdrawing money from your pension before aged 55 are:
- ill health – if you have a serious illness that prevents you from working or you’re under 55 and terminally ill with a year to live. There’s more on this below.
- Protected Retirement Age (PRA) – this generally applies to careers where an early retirement is normal, like a professional sportsperson or those in the military.
Ill health retirement
Sometimes, retirement is less about frolicking and more about focusing on health.
If you have a health condition or disability that’s consistently making work challenging or seriously affects how much you could earn, you could be eligible for early retirement. Ill health retirement, or being ‘medically retired’, means that you’re allowed to withdraw money from your pension before hitting 55 because an illness or disability prevents you from working.
Before thinking about retiring early from ill health, it’s important to chat with your employer about any reasonable changes that could improve your work life so that you’re not disadvantaged by your medical condition or disability.
To qualify for ill health retirement, check with your pension provider what rules and criteria apply. Generally, you’ll need to:
- show that you’re permanently unable to do your job as a result of a physical or mental condition. You'll need to give evidence through a registered medical practitioner.
- show that there aren’t any further medications or treatments that could improve your health so you could work to the expected pension age.
The ill-health condition is the basic requirement set by tax laws. Realistically, scheme rules may have stricter ill-health criteria. For example, they may say that you must be unable work in any job (or any capacity), rather than the current job you're in.
If you’re expected to live less than one year, with a terminal diagnosis, you may be able to take your entire pension pot as a tax-free lump sum (that’s if you’re in a defined contribution scheme). In this case, you’ll need to be under 75 years old and your doctor will need to confirm the diagnosis.
How can you retire early?
This is about outlining your dreams and expanding it to understand how much those dreams will cost over a few decades alongside day-to-day living costs.
Deep breath, that’s a lot. You’re searching for the ‘£’ amount that will give you financial independence from a job. In other words, what it will take for your outgoings to be less than your income and savings for the rest of your life.
Now you might want a spreadsheet.
Getting to financial independence often means:
- paying off your debts – be that credit card debt or Cheryl down the road who loaned you £30 that one time
- paying off your mortgage – or being close to doing so
- enough income – for your daily needs
- more income – for your fun needs
- savings – for any emergencies or unforeseen expenses
And while it may take time to put all these numbers together, it’ll help for the next steps.
Creating an early retirement plan
Once you have a vision outlined and some idea of the finances it would take to move you towards early retirement, there are a few tools and steps to help move you closer.
First, to help you estimate how much your pension could be worth when you retire, check out our pension calculator to guide your retirement planning. Set aside five minutes and have a rough idea of the current value of your pension, how much you (and your employer) pay into them and when you’d like to retire.
Second, create a financial roadmap with a few key mile-markers towards financial independence:
1 Pay off your debts and mortgage – this means paying off debt before building up savings. This might seem counterproductive, but the amount you pay on interest for debts could outweigh the interest you earn on savings.
If you have a number of debts, it’s important to pay at least the minimum payments and then pay off the debt with the highest interest. If you’re able, move as much debt to the lowest interest rate card to help pay the total debt down.
And if you’re able to make overpayments on your mortgage without receiving charges or fees, you’ll pay off your mortgage sooner and pay less overall. Ask your mortgage broker or provider about the terms around early repayment.
2 Work out the basic costs – stretch your index finger muscles and bust out your (phone) calculator because it’s time to crunch some numbers! From food to frugalities, leave the fun until later, it’s important to know the minimum you’ll need to spend each year to have a sustainable lifestyle.
The idea here is to only focus on the essentials, so keep any flexible costs (like travel, house maintenance, family outings) until the next step.
3 Work out the optional costs – having a solid grasp on the essential costs, it’s time for the tricky one. Figuring out your discretionary spending means detailing your plans for retirement and, if you’ve not had a peek at it yet, check out the Shape my Future tool to help you along. From where you want to live to how many holidays you’d like to take and what car you’d like to own, figuring out these numbers can be inspiring (f not a bit breath-taking).
4 Figure out what money is flowing in – it’s not just your pension that could help support you in retirement. A list of your assets could include:
- workplace or private pension pots – as this may be your main source of retirement income, estimate how much you get from drawdown, an annuity or perhaps both. If you believe there’s a pension pot hiding somewhere in your past, you could also use the government’s free service to search for a lost pension.
- income from final salary pensions – this may not apply, but it’s worth including it in your list if it does.
- savings and investments – before retirement, you could think about transferring some other savings and investments into your pension as they could get a boost from tax relief. It's important to remember however, that the value of pensions and investments can fall as well as rise, so you could get back less than the amount that's been put in. Before thinking about transferring you should consider taking advice to make sure it's a suitable option for you.
- your home – whether letting a room or downsizing to a smaller home, your home could be a substantial source for your retirement income.
- further properties – renting out other properties for ongoing income in retirement is helpful, but it does come with significant responsibility.
- other income from post-retirement work – taking on part-time work or selling those fantastic clay pots you hand-crafted after pottery lessons, having a part-time gig could also help with an added income in retirement.
5 Put it all together – once you have your basic costs, optional costs, sources for all your potential retirement income, and how long you’ll be in retirement, then you have a better picture of what to expect. Ultimately, you need to figure out if your assets can cover your essentials or your essentials plus the discretionary spending over the course of your retirement years.
If you’d like some help navigating this, through the excitement of daydreaming and the reality of the numbers, Aviva Financial Advice and advisers can help you with your financial planning needs.