The latest figures from the Office for National Statistics show that those 50 and above, had the highest redundancy rate throughout the coronavirus (COVID-19) pandemic. Although many dream to have an early retirement, the current circumstances have made it the only option for many individuals throughout the UK.
In your 50s, you might be considering retiring early and may want to stop working and have a “change” in your lifestyle, but there are financial implications in doing so that must be taken into account.
How would retiring early affect your financial situation?
Retiring at a certain age, most commonly between 60 and 65, used to be the norm, but there is no specific requirement on when to do so. From a legal perspective, you would be eligible to access your pension funds from the age of 55 and there are also government plans in place to increase the pension age to 57 by 2028.
As you approach retirement, it’s important to start planning what your life will be like. If pre-retirement earnings were lower than post retirement income, then things may not go quite smoothly financially in this new phase of your life. An important first step is to work out how much pension income you’re going to get in retirement and make sure that it’s enough to cover your expenses. Additionally, you may want to take into account other sources of income such as investments, savings, your State Pension as well as other types of pensions you might have.
With regards to the State Pension, the current government rules in place allow you to access your State Pension at the age of 67. The State Pension is a common source of retirement income for most Brits but in order to qualify for it, you also need to work for a specific amount of time before retirement and if you plan to retire before 67, you will need to think of alternative sources of income as you won’t be able to draw income from it. Your private pension could be an alternate source.
Another factor that might impact your retirement plans is inflation. There is a noticeable trend over the last couple of years that indicates the gradual price increase of many goods, services and basic necessities. So if you’re looking at a retirement of 25 years or more, you could see the purchasing power of your pension income decrease due to rising prices.
Evaluating your financial situation
In order to outline next steps, it is critical to understand your personal financial situation. It is important to take the time and do your research before you retire. Evaluating if early retirement is a viable option involves conducting a complete review of your existing and future expenses, as well as your retirement income.
Here’s a list of the most relevant factors you may want to take into account:
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understanding YOUR expectATIONS FOR retirement
Determining what type of life you would want to live during retirement is the first step in the planning process. Establishing if you would enjoy this part of your life traveling, seeking further qualifications or spending leisure time with valued family members and loved ones, is going to give you an overview of what you’d expect from your retirement.
A significant emphasis could be placed on your early retirement years, as your expenses during that stage could be different compared to later phases of your life. As a young retiree you might want to spend more time visiting local amenities, traveling abroad more often, or even enjoying dining out on a regular basis.
Afterwards, your lifestyle will naturally slow down and you may want to spend more time with your loved ones, rather than regularly traveling abroad. It is important to note that even if there are fewer leisure activities, new additional costs such as elderly care services, might become necessary. Planning for your retirement should involve two stages. One that focuses on your early years of retirement, where you would naturally be more active and another that would focus on the later stages of your life. Both will have their own unique financial implications and would require a different approach.
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How long would your retirement last?
Evaluating how long would a person live is a complicated matter but there are some factors that could guide you assess that. Taking into account your family history, any illnesses or diseases that your parents could have suffered from, as well as the demographics of the region you were born in, could help you make an educated guess.
For example, if you personally evaluate that you would live to around 80 and plan to retire at an early stage, your retirement savings should be enough to last for approximately 30 years. Additionally, there is always a possibility that you could outlive your parents or other family members and live for far more than you would have expected.
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What is the value of your State Pension?
Planning for the later stages of your life, involves understanding how much money you would be entitled to from your State Pension and when would you be eligible to collect it.
The Government actively reviews the State Pension age and often associates it with a change in the average life expectancy. There are other factors that impact the value of your pension, such as your gender and the time period you were born in.
As of now, the maximum State Pension is £179.60 per week, or £9,350 a year [2]. However, you’ll need to have made, or be credited with, 35 years of National Insurance contributions to qualify for the full amount [3].
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reviewing the value of your private pension fund.
A Workplace or Private Pension could constitute a significant portion of your retirement income and would usually supplement the money that you would get from your State Pension. Currently there are options that you may want to explore which entail purchasing a specific annuity package. The annuity would then continually pay you a specific amount for a set period of time or for the entire remainder of your life.
Another method is to keep your savings income in your pension pot and “drawdown” or withdraw an amount whenever you deem fit. You may be eligible to do this if you currently have a defined contribution pension.
We recommend you conduct a complete audit of all of your existing pension pots and reach out to a financial adviser requesting for a pension assessment and income forecast to evaluate all your options. Through this exercise, you might realise that you may want to proceed with a hybrid approach that will consist of purchasing an annuity, a pension drawdown or both.
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How would you know if your pension income will be enough?
Planning for the future will help you understand the retirement income that you may need throughout your later years in life. Reviewing your existing financial situation and evaluating if an early retirement is suitable for you or alternatively deciding that you would need to continue to working to increase the value of your pension pot, is a decision you can make now vs. later when it is too late and you might outlive your income.
In order to make a confident decision, you have to take into account different factors that are completely unique to your individual circumstances. If you need an accurate assessment on your current situation, it’s best to consult with a professional financial adviser who will give you perspective of your personal finances and help you plan accordingly.
What will your retirement look like?
Living life on your terms is an exciting concept. You may want to retire early and enjoy your time by exploring different countries or spending more time with your loved ones. Alternatively, you may be thinking about embarking on a journey seeking higher education or developing entrepreneurial ambitions and opening your own business.
No matter what your circumstances might be, our team of financial advisers are here to discuss your future and how to best plan for it. We offer a free, no obligation initial consultation to get started: Click here.
Sources:
[1] Living longer: older workers during the coronavirus (COVID-19) pandemic. Data source, O”ce for National Statistics, May 2021.
[2] Having more for retirement. Data source, GOV.UK, August 2021.
[3] The new State Pension. Data source, GOV. UK, August 2021.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION WHICH ARE SUBJECT TO CHANGE IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.
