early retirement

Retiring Early: Can I Do It?

havenifa

havenifa


Posted on: 12th Sep 2018

Retiring early can seem like a wonderful option if you have been made redundant or simply want a change. However, it is important to weigh up the pros and cons. Take your time to think carefully about how you will manage financially and how your lifestyle will be affected.

Retiring Early: The Good and the Bad

You may have plenty of good reasons for taking early retirement. You may fancy a lifestyle change, wish to improve your health, or you may simply dislike your job. Whatever the reason may be, you need to think carefully about the downsides.

For one, your pension will be smaller than if you were to work until normal retirement age. This is often the case unless your employer is offering a substantially enhanced package. However, this is not so common. You also need to consider the fact that you won’t receive your state pension straight away. The earliest you can start taking your workplace pension is 55, but you won’t get a state pension until your mid-60s. This could be later depending on your current age.

Early Retirement Benefits you may not be aware of

As life expectancy continues to increase, the average time spent in retirement is nearly 20 years. This is more than double that of our grandparents. What’s more, many employers will try and make your early retirement package more attractive. They may build some particular incentives that could be quite tempting to take. The incentive that they offer is likely to depend on the type of workplace pension you are in.

You have two types of workplace pension: defined contribution and defined benefit. Here are some incentives your employer may offer:

  • A lump-sum payment into your defined contribution pension. This will boost the value of your fund.
  • Pension benefits that are calculated based on if you had worked to normal retirement age. This is for those in a defined benefit scheme.

Either incentive is likely to provide you with a much better pension than you may otherwise be entitled to. You can speak to your employer about the kind of pension you have and what incentives are available.

Think about the Facts

When you are thinking about early retirement, it is easy for you to be swayed by your imagination. Winter sun, more days to spend in the garden with your family, etc. However, what you really need here is a cool head a sense of discipline. It’s a good idea to have a checklist.

Calculate your Income

You can use a benefits calculator to find out what you may be entitled to. It is likely that your total income is a lot more complicated than your monthly salary. You may receive an income from more than one pension, as well as from savings and other benefits from a part-time job.

The first step is to add everything up. You can ask your employer for an illustration of the pension you will get form retiring early. You can also get a forecast from any other pensions you have if you intend to start those early. For example, you may have a personal pension or one from a previous employer.

If you choose to purchase an annuity, or you will receive payouts from a defined benefit pension, you should check whether they have built-in increases each year. You may wish to put off claiming some pensions for now if they don’t. You may also want to consider saving extra.

Financial Commitments and Regular Spending

GOV.UK have a handy budget planner to help calculate how much money you will have coming in. You can also figure out what you will spend it on. If you are no longer working every day, the way in which you spend your money will change. For example, you may save money on travel costs, but more on household bills. You will also have to think about losing out on any workplace benefits. This includes things such as bought lunch, company car, health insurance, etc. You then must think about the cost of your lifestyle that you choose for retirement.

Your Pension Options

If you choose to retire early, you will need to consider the options for your pension fund. If you have a defined contribution pension, you will be able to take as much money as you would like. A quarter of this money will be tax-free, but the rest will be taxed.

Phased Retirement

Many people prefer to retire on a gradual basis, but don’t wish to stop working completely. Depending on your workplace scheme, you may be able to draw just part of your pension for now. You can then increase the amount later on. If not, you may wish to consider transferring to a personal pension of your choice. However, it is important to be careful when it comes to transferring. This option could result in giving up a particularly valuable pension or guarantees. Another option would be to take your employer’s early retirement deal and look for a part-time position elsewhere.

Get Advice from Haven IFA

Planning your pension can be a confusing process. If you find yourself in any doubt about what your next steps should be, Haven IFA are here to help. We can sit down with you to discuss your options before you make any major decisions. Get in touch to see how we can help get your ready for an enjoyable retirement.