Early Retirement Planning
Planning ahead - How much pension are you due?
In order to plan for your life out of work, it is important that the first step is to ascertain how much money you will have to work with during your retirement.
The best way to do this is to contact pension providers past and present directly to find out what your final pension will be, it is vital that this is done before you retire.
Your state pension can be estimated using the government's website: State pension calculator
You should be contacted by the pension service four months prior to reaching retirement age
What age to retire?
The age at which you decide to retire is completely up to you, however it is important to remember that although you can claim a private or workplace pension from 55, you cannot claim state pension until you reach state pension age.
An important consideration is that the earlier you plan to retire the more money you will need in total.
Retiring early means that it is likely that you will receive a smaller pension.
Your employer may offer you an attractive package to retire early such as a lump sum contribution to your pension fund. It is important to weigh up the value of the package and if in doubt independent financial advice can make this a lot clearer.
An attractive option could be working part time past retirement age. Phased retirement can mean a larger pot of money for when you do decide to retire with the added bonus of not having to pay national insurance (as well as offering a gradual transition).
In today's world people are commonly living beyond 20 years in retirement
How much money will you need?
Once you've set a retirement date you can start calculating how much money you will require.
Considerations that need to be made include life expectancy, where you plan to live and the activities you plan on partaking during your retirement. Independent financial advisers can work through your living costs and future plans with you face to face and give you a true idea of how much you will need.
An important consideration is that if you do plan on moving abroad after you finish work, you must notify the department of work and pensions and any private pension providers so that you can still claim your pension when you arrive at your dream destination.
Will the Tax free lump sum affect your annuity?
You are now able to take 25% of your entire pension fund in one lump sum when you retire free of tax. This can be an attractive option for many, especially if you have holidays or ventures that you want to spend / invest your money on. The lump sum will affect the size of your remaining pension pot and therefore your annuity if you chose to get one.
The benefits of not paying tax on this money must not be forgotten as this often outweighs the reduction to your annuity payments.
Since 6th April 2015, those with defined contribution pensions who are at least 55 have the option to take a tax free lump sum and a lifetime annuity. However there are now more options to consider in providing an income.
What benefits are you entitled to?
1 in 3 people eligible for pension credit are not claiming it. Pension credit tops up low weekly income to £151.20 if you're single or £230.85 if you're a couple (2015-2016). Other benefits that could greatly reduce your out goings include: free TV license, a free bus pass, a senior rail card and a winter fuel allowance of up to £300.
Why you should seek independent financial advice
Weighing up the additional cost of retiring early with your planned living expenses as well as negotiating an annuity and considering what to do with your lump sum can become quite complicated. It's always sensible to seek independent financial advice. A face to face service can help you simplify a retirement plan specific to your desires and needs, it will also allow you to be confident in calculations. The need for financial advice is even greater when considering an early retirement as you may need to stretch a smaller pot of money over a greater number of years.