Pension Freedom has reinforced the idea that we are able to retire early, as pension funds are accessible from age 55, but comparatively few people can really retire then. When you can realistically retire depends on three major parameters,
Are you happy in your work life?
How large is your pension fund?
How much income do you need to be comfortable?
If you enjoy your job, there is no urgency to leave; some people live to work. Others work to live, so they are looking for the ability to retire as soon as practicable; the answer to “When would you like to retire?” being “Tomorrow!”
For those with no pension outside of the State pension scheme, there will be little debate, the soonest they will be able to retire is when state pension is due, which is currently a movable feast. Visit the .gov.uk website for details. For most people looking at retirement now, state pension age will be 67, with the government keeping it under review, so workers should expect it to rise in the future.
For those who have pension provision over and above the State Pension, if they are 55 years old today, they can access their assets immediately.
So, assuming you want to retire before State Pension age, you will need a pension fund initially sufficient to tide you over between retirement and State pension age; but also sufficient again to top the state pension to the level of expenditure you would like to sustain.
As an approximate rule of thumb, think in terms of 4% yield on a fund for pension drawdown and around 5% on an annuity, so a pension fund of £400,000 would give you a sustainable income of around £16,000 per annum before tax.
Now we have an indicative income figure, the question becomes can you live on it? Early retirement can be confusing as you no longer have to meet the costs of working, (commuting, work clothes, lunches away), but your leisure costs will rise with the availability of more free time. An early splurge on travel, hobbies, meeting new people and more holidays is not uncommon while health is good and the desire is there. Spending typically falls as people get older, but expenses will rise dramatically if you need to go into long term care at any time.
No two retirements ever look the same; one huge advantage of engaging an adviser is the ability to test some “what if” scenarios to see how close you can get to your ideal retirement.
Picked our details from the Unbiased website, as he had just become 55 years old. He asked when he could retire, which, when we assessed his pension fund and normal expenditure was immediately! Within six months he had resigned, retired and is now using pension drawdown on a phased income basis, (25% tax free and the balance of his annual income taxable). State pension is still a few years away, but he is taking less than the annual investment growth on his fund, so his fund value is rising slowly.
Mr & Mrs S
Mr S had some accumulated debt and had just reached State pension age. Mrs S was a higher rate tax payer in a demanding job, with additional consultancy income and some ideas towards some additional business income. For Mr S, we arranged a pension transfer to a drawdown plan that enabled him to take his tax-free cash to pay down his debts and significantly reduce his outgoings. He continued his self-employment at a reduced level, picking and choosing the clients he’d like to work with . He will, most likely fully retire next year.
Mrs S was advised to pay into a pension scheme to reduce her tax payments and to add to her personal pension funds that she had already accumulated. She will, most likely, retire in the next three years, after the mortgage has been paid off.
For both of them, having a firm handle on their pensions and how much they will have coming in has allowed them to concentrate on what is important to themselves. They can pick and choose what they do, as money forms a much smaller part of the equation. As both are risk-averse, the final retirement solution will probably be tailored annuities.
How do I get professional advice to help me understand when I could retire?
If you would like to discuss automatic enrolment or your wider retirement planning please contact us at firstname.lastname@example.org or call us on 01223 792 196. We’d be delighted to help.
About Martin-Redman Partners
We are a team of experienced Financial Advisers who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.