Is 55 too early to retire?

Taking an early retirement appeals to many people unsurprisingly, but making it a reality requires careful consideration and well-thought out retirement planning.

In the UK, the current state pension age is 65. By 2020, the state pension will rise to age 66 and there are plans for this to continue to increase. The 2019 Close Brothers Financial Wellbeing Index found that 46% of UK workers aged 55 and over felt under prepared for retirement.

For those who are planning on retiring early, you will want to feel prepared as early on as possible. You can usually access private pensions from the age of 55 which makes it an age often associated with retirement. In this article, we discuss the steps you can take to create a financial plan that will make your early retirement dreams a reality.

Work out how much you’ll need to retire

The benefit of starting a pension early on and paying into it regularly means you’re able to take advantage of the compounding effect. Compound interest allows you to earn interest on top of both your savings and existing interest and accumulates over time meaning the longer you save, the more your pension pot earns.

If you’re looking to retire at 55, you’re much more likely to have the comfortable retirement you dream of if you started saving for it early in adult life. Otherwise, you may wish to increase the payments into your pension pot, so you can meet the level of income you will need for a comfortable lifestyle.

43% of the population admit they don’t know how much they will need¹. One way of estimating how much you’ll need is by referring to the widely used '70 per cent’ rule which states that you’ll require 70% of your working income to maintain the same level lifestyle. Whilst this gives you a good idea of the amount you’ll require when considering retirement you may find that you’ll need more or less. You should consider what you plan to do in retirement and account for unexpected costs, such as long-term care as these will need to be factored in to help you estimate your retirement costs.

Creating an overall budget and living costs as well as other expenditure you’d like to plan for, such as holidays will further help you reach a more realistic retirement target figure. If you’re retiring early, your money will need to last longer, therefore, it’s important to account for the extra years. Speaking with a qualified financial planner can help you create a plan and they can provide you with personalised advice.

Pension tax savings

The government automatically adds basic rate tax relief of 20% to pension contributions. If you pay tax at the higher rate, the tax relief percentage increases to up to 45%, depending on your income. For example, if you contribute £500 to your pension, the government could automatically add up to another £225, dependent on the level of income tax you pay.

It’s important to double check that you’re claiming pension tax relief. If you have a personal pension, and you’re a higher or additional-rate taxpayer, you will need to complete a self-assessment tax return to receive the extra relief due.

It’s worth bearing in mind that the annual allowance gives you £40,000 as the maximum amount you can pay into your pension(s) each year and get tax relief on. It’s possible to use carry forward to reduce your tax charge if you go over the annual allowance limit, by carrying forward unused annual allowances from the last 3 years. There are conditions to using carry forward that need to be met, and pensions rules can change.

Investing wisely for retirement

Saving into a personal pension such as a Self-Invested Personal Pension (SIPP) allows you to make your own investment decisions and tax relief applies as it would to a company pension. Should you have a company pension, it’s worth noting if you are able to pay more in to it, the company may provide additional benefits. You can also have your own pension which you have more control over and can help provide you with an additional income when you retire.

Another option for saving and investing is a Stocks & Shares ISA. Like the SIPP, this type of account allows you to hold a wide range of investments, and all capital gains and income are sheltered from tax. Each individual can contribute £20,000 per year into a Stocks & Shares ISA though they don’t benefit from additional payments from the tax man.

It’s important to remember that unlike Cash ISAs, with Stocks & Shares ISAs and investments within pensions, your capital is at risk. The value of your ISA and SIPP depends on the future performance of the investments held.

Your attitude to risk will likely play a part in the types of investments you’ll choose. Typically, the more risk you’re exposed to, the greater the potential returns, but this comes with higher volatility and the chance that you could get back less than you invest. As you get closer to the age of your planned retirement, there is less time to recover from any losses, so switching to lower risk investments at this stage could be a sensible option.

Income withdrawal strategies

At 55 you can choose to take your pension as a lump sum (once or periodically), as an income (an annuity that provides guaranteed income) or as a mix of both. How you choose to draw your income is up to you, with 25% available as a tax-free lump sum, and the rest taxed. Your state pension will not be available to claim at 55 so do not include this when working out your income for the first part of your retirement. Withdrawing your income is a crucial decision that you often cannot go back on once it’s made, so be sure to only make your choices after weighing up your options carefully.

Retiring at 55 is an attainable target if you start early and develop a sound financial plan. We recommend speaking with a qualified financial planner, who can give you the right advice to assist you with getting to where you want to be.

To find out more about planning for retirement or if you have any questions about financial planning, request a call back.

Capital at risk.

Sources:
¹ - https://www.finder.com/uk/pension-statistics
2019 Close Brothers Financial Wellbeing Index