Early retirement
July 2010
Is it really the best move for you?
Lots of us would jump at the chance to quit work, but it’s worth taking a pause to think things through.
While the prospect of having more free time to pursue your own interests may sound inviting, there are financial considerations to take into account in decisions about early retirement.
Waiting for the State Pension
The first thing to consider is that you will not be able to draw your State Pension until you reach State Pension age, regardless of whether or not you continue working. Currently the State Pension age is 65 for men and 60 for women. This means that you will need to rely on other sources of income if you choose to retire before then, such as a personal or occupational pension, or other savings.
There are plans to increase the State Pension age, for more information about this, please read The basics – The State Pension.
When can you draw your own pension?
Currently the earliest that you are allowed to start drawing your personal or occupational pension is 55, although this minimum age may vary depending on your health. It is important to check with your pension provider or employer for their rules on early retirement.
If you decide to take early retirement and begin drawing your pension, it is likely that the amount of money you receive will be less than if you had continued working. Your pension pot will be smaller because you will have been paying into it for less time and, because you are retiring early, the length of your retirement will be longer, so the money needs to go further.
Top up your pension
One way to enable you to take early retirement and yet receive a larger income than you might expect could be to make larger contributions to your pension fund before you retire early. Following the reforms to the pensions system in April 2006, it is now possible to contribute up to 100% of your annual income into your pension fund (up to £255,000 in 2010/11).
For occupational pension schemes (either final salary or money purchase schemes), rules on taking early retirement are likely to vary, and you may need the permission of your employer and the scheme’s trustees. There is no legal obligation to offer early retirement options. Consulting your pension administrator is probably the best course of action. If you are offered early retirement as an alternative to redundancy, or due to ill health, the rules are also likely to be different.
As well as having to wait until pension age to receive your State Pension, retiring early may also affect how much State Pension you receive. In order to qualify for the full amount of basic State Pension, you need to build up the required number of qualifying years - tax years where sufficient National Insurance contributions (NICs) have been made.
To find out more, read The basics - The State Pension.
Additional NICs
One possible solution to this, however, is to make voluntary NICs following early retirement, to make up the qualifying years and qualify yourself for the full basic State Pension at the state retirement age. However, check to ensure that you will not exceed the new lower level of qualifying years needed to meet the requirements for a full State Pension.
In conclusion then, making the decision to retire early is one that needs to be made carefully. The bottom line is that you will need to decide if the move is affordable for you, and this will depend on how much you have already been able to save up. If you feel that this will provide a sufficient income throughout your extended retirement, early retirement could be an option. As a general rule however, working longer will mean a bigger income for you in your retirement.
How to find out more
If you want to retire early make sure you talk to your financial adviser.
You and your money provides general information and not advice. If you are seeking advice on financial matters you should contact a qualified financial adviser. If you do not have a financial adviser and would like to contact one, you can search for one here.
