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For many people, retiring in their 50s or even earlier is the ultimate dream. Moreover, since the introduction of the Pension Freedoms in 2015 which allows people to access their defined contribution pension from the age of 55, this is theoretically more possible than before. On the other hand, the costs involved can be significant and it’s important to consult a financial planner to ensure your retirement savings can indeed sustain you, potentially for many decades.
In this short guide, our financial advisers here at Cedar House will be sharing some of our thoughts on how people can achieve early retirement from 2020. It will not be a feasible goal for everyone. Yet, with careful financial planning, discipline and appropriate wealth and income, it can certainly be accomplished. We hope you find this content helpful and invite you to get in touch if you want to arrange a free consultation regarding your own retirement strategy:
020 8366 4400 or firstname.lastname@example.org
Early retirement: gather your information
It’s important to have good, personal reasons to seek early retirement. It might be that you no longer like your job, and a career change isn’t realistic at this stage in your life. Perhaps you are keen to spend more time with your grandchildren. Or maybe you wish to travel the world with your significant other. There are many great reasons to retire, but it’s not a decision that should be taken lightly. After all, many people struggle with the idea of retirement. The loss of routine and identity from no longer working can be challenging, for instance.
Assuming you are confident that early retirement is a deeply-held personal goal, it’s time to consider some of the facts you’ll need to know. First of all, bear the state pension in mind when thinking about your retirement plan. In 2019-20, you might be able to access your defined contribution pension(s) from aged 55, but from October this year the state pension age will be 66 for both men and women. This means that, assuming you retire at 55, you will be unable to access an important source of retirement income for at least 10 years.
The other important fact to consider is that early retirement also means that you might lose 10 or more years of pension savings and growth. Almost inevitably, this results in a smaller pension compared to waiting until your state pension age. It also means that your pension savings will likely need to stretch further over a longer retirement. Admittedly, this might not be an issue if your financial adviser has consulted with you, and your savings and income streams are already sufficient to sustain you for three or more decades.
Be careful not to underestimate how much you might need in retirement. After all, if you retire at 55 and end up living to 100, then you would likely need pension savings which pay out at least tens of thousands per year over 45 years.
Consider the MPAA
We mentioned earlier that early retirement should not be taken lightly. One of the reasons for this is due to a little-known rule called the Money Purchase Annual Allowance (MPAA). This has important implications if you are thinking about “trial running” early retirement, with the option of returning back to work, should things not work out.
In 2019-20, the MPAA rules state that once you have started flexibly accessing your pension benefits, then henceforth you face more limitations on how much you can contribute to your pension(s) within a given tax year. In 2019-20, the limit is £4,000. This is considerably less than the usual annual allowance most people are entitled to, which allows you to contribute up to £40,000 per year towards your pension (or up to 100% of your salary – whichever is higher).
The point is this. Don’t make the mistake of thinking you can simply return back to work if early retirement doesn’t work out for you. Ensure you speak to your financial adviser about the MPAA and similar pension rules, to ensure you have all the information and that you are certain early retirement is what you want.
A note on final salary pensions
Those with a keen eye might have noticed that the 2015 Pension Freedoms allow people to access their defined contribution pensions from age 55. However, what about those with final salary (or defined benefit) pensions? Is the same flexibility open to them?
Bluntly put, things are likely going to be more complicated for you if you hold a pension like this. These schemes do not involve building up a pension pot throughout your career, which can later be accessed in retirement. Rather, your employer promises to pay you a guaranteed annual income once you retire based on factors such as your career earnings, accrual rate and years of service. Each final salary scheme is different depending on the employer, but most will prevent you from accessing their benefits until you reach age 60 or 65.
There are ways around this, however. In particular, you could speak to your financial adviser about the idea of transferring your final salary pension into a defined contribution pension. This effectively turns your employer’s promised retirement income into a lump sum, which you can then access from the age of 55. However, be very careful to seek independent financial advice on this matter. Once you transfer out of a final salary pension, you cannot go back. The benefits are hard to replicate elsewhere, and there are risks involved with transferring which you should weigh carefully under the counsel of a professional adviser.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation: 020 8366 4400 or email@example.com.