Early retirement might sound like a good idea if you’re made redundant, or want to make a change, but it’s important to weigh up the pros and cons. Take the time to think carefully about how you’ll manage financially and how it might affect your lifestyle.
Early retirement – the pros and cons
You might have lots of good reasons for taking early retirement.
It can be an attractive option if you don’t like your job, if you fancy a change in lifestyle, or you think it will be better for your health.
But whatever the reasons, it’s important to also consider the downsides – and there are a few big ones, including:
- Smaller pension. You’re likely to receive a smaller pension than if you worked until normal retirement age, unless your employer is offering a substantially enhanced package.
- No State Pension right away. The earliest you can usually start taking a workplace pension is 55, but you won’t get a State Pension until your mid-60s, or later depending on your current age.
What other early retirement benefits you should be aware of?
As life expectancy increases, the average time spent in retirement is nearly 20 years – more than double that of our grandparents.
Many employers will try and make your early retirement package more attractive by building in some incentives.
The incentive they offer you will depend on what type of workplace pension you’re in.
There are two types: defined contribution and defined benefit. Incentives your employer might offer could include, for example:
- A lump-sum payment into your defined contribution pension to boost the value of your fund
- Pension benefits that are worked out as if you had worked to normal retirement age (if you’re in a defined benefit scheme)
Either incentive will give you a better pension than you might otherwise be entitled to.
You can ask your employer what type of pension you have and what sort of incentives are on offer
Deciding about early retirement – consider all the facts
When considering retiring early, it’s easy to be swayed by thoughts of winter sun, days spent in the garden or more time with your family.
What’s required here, however, is a cool head and a disciplined approach. In short, you need a checklist.
Work out how much income you’ll have
Your total income is likely to be a lot more complicated than it was when you simply received your salary at the end of each month.
You might receive income from more than one pension, as well as from savings and from benefits or from a part-time job.
The first step, then, is to add it all up.
- Ask your employer for an illustration of the pension you’ll get if you take early retirement.
- Get a forecast from any other pensions you have (such as a personal pension or one from a previous employer) if you intend to start those early too.
- If you decide to buy an annuity or will be receiving payouts from a defined benefit pension you should check whether they have built-in increases each year. You might want to put off claiming some pensions for now or even save extra if they don’t.
Calculate your financial commitments and regular expenditure
How you spend your money will change if you’re not going to work every day.
For example, while travelling costs might come down, household bills might go up.
You’ll also have to think about the loss of any workplace benefits (such as a subsidised canteen, company car or health insurance).
Then there’s the cost of the lifestyle you want to lead in retirement.
Find out when you can collect your State Pension
The state retirement age is increasing. For men it’s currently 65, rising to 66 by 2020.
For women it’s over 62, gradually rising to 65 by 2018, and 66 by 2020.
Your pension options
If you take early retirement, you’ll need to decide what to do with your pension fund.
If you have a defined contribution pension, you’ll be able to take as much money as you want out of it.
One quarter of what you take out will be tax-free. The rest will be taxable.
Many people like to retire gradually, without giving up work altogether.
Your workplace scheme might allow you to draw just part of your pension for now, increasing the amount later on.
If not, you might want to consider transferring to a personal pension that you choose.
However, be wary of transferring if it would mean giving up a particularly valuable pension or guarantees.
Another option could be to take your employer’s early retirement deal and then look for another job – perhaps part time.
Pension planning can be hard to understand at the best of times.
If you’re in any doubt about what to do, it’s important to talk to an independent financial adviser before making any major decisions.