We all want to enjoy retirement and make the most of our time when we’ve finally finish work. And for some of us, this means giving up work before we reach 65.
Whether you want to travel the world, move to a warmer climate, or just put your feet up and relax, early retirement will require that you plan ahead.
Points to consider with early retirement
The rules on when and whether you can take early retirement vary, so find out what the rules are for your personal and/or company pension scheme(s).
Also, the Government has changed the rules governing when you can start to take your pension. After April 6th 2010 you will have to wait until you are aged 55 to start drawing a pension. If you want to retire sooner ,then you will need to act quickly – ideally by March 2010.
Taking early retirement will mean that you will have fewer years to make pension contributions, so you may have a smaller pension pot. In addition, you will need income for longer, so your pension payments will be smaller as the fund has to last longer. To make up for these shortcomings you will need to increase your pension contributions and possibly National Insurance contributions.
Ideally you should start increasing your pension savings early (in your early 20s) to give you longer to make up for those years when you (and your employer) are not making pension contributions. This may involve sacrifice on your part – forgoing an expensive lifestyle to save, save, save.
How much you can expect if you retire early
The amount of pension you will get from an occupational scheme depends on the type of scheme. If you are a member of a final salary the amount you can expect will be based on a fraction of your salary multiplied by the number of years you’ve been a member. For members of defined contribution schemes your pension will be based on the size of your pension pot, annuity rates and life expectancy. Check your scheme details or speak to a financial adviser for more information.
Personal pension members will also find their pension payment will depend on the size of their pension fund, annuity rates and life expectancy.
What about the State Pension?
To get a full State Pension you usually need between 40 – 44 years of National Insurance Contributions, so you may want to think about boosting your NI contributions. Also, you won’t receive State Pension payments until you are at least 65, so don’t expect to rely on this to supplement your income prior to reaching 65. Moreover, the state pensionable age is due to increase in the coming years and, under current legislation, it will be age 68 by the year 2046.
Retiring early due to ill heath
pension schemes will let you retire early due to ill heath or incapacity. However, just what qualifies as “incapacity” will vary between schemes and employers. Generally speaking, if you are too ill to work (either in your current role or any role) you may be able to qualify for early retirement due to incapacity. Again, what you can expect to receive will depend on the scheme and its rules. Employers are tightening up their rules on early retirement due to incapacity because of the costs this can involve.
Taking early retirement rather than redundancy
Often, companies that are looking to reduce their head count will offer early retirement as a sweetener to older members of staff. Typically, this includes incentives to take retirement early, such as a large lump-sum payment.
Whether early retirement in this situation is a good option will depend on your individual circumstances and what is on offer from your employer. But remember you have not had a chance to save for early retirement. So, although the offer may sound good, you may be looking at a significantly reduced pension payments in retirement if you accept. Before you act be sure to study your options carefully and get financial advice.
Early retirement – is it right for you?
Early retirement can be tempting, but if you don’t prepare for it you can set yourself up for years of poverty. If you are serious about early retirement or have it forced upon you, find out about your options and get professional advice. You are never too young to start saving.
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