How to Retire Early in the UK?

Welcome to the Moneyfarm article that will advise you on how to retire early in the UK. We will take you through the necessary steps to achieve early retirement in the UK and, in the process, hopefully, answer any queries you may have.

What does early retirement mean?

Retiring early means different things to various people. Many people, for example, are set on taking early retirement at 62 in the UK, while others are intent on figuring out how to retire at 55. But regardless of your retirement target age, the fundamental considerations are the same as those shown below in the bullet point list.

What do I need to retire early?

Here’s what you’ll need to consider if you want to retire early in the UK:

• Settling any debts, including, if possible, your mortgage.
• Figuring out the basic income you will need in retirement.
• Making an allowance for discretionary spending in retirement.
• Approximating your total costs during your retirement.
• Working out what income you will get in retirement
• Doing a pension transfer exercise

It’s not as complicated as it sounds, but each step is just as important when it comes to effective retirement planning.

Settling debts

Before taking steps to retire early and actioning your retirement plans, it’s essential to settle any debts, including, if feasible, your mortgage, if you have one. Debt interest has a way of mounting up, and it can significantly impact the amount of disposable income you have that could otherwise be invested for your retirement.

If you are facing the problem of how to retire early with little money in the UK, getting rid of your debt will prove an enormous benefit.

Early retirement – the pros and cons

We are all different and have different options on early retirement. Not everyone thinks that early retirement is a good idea. Some people hate the thought of it and decide to work on and defer their state pensions when they reach the state pension age. So let’s look at the pros and cons of early retirement in the UK.

The advantages of taking early retirement

• No more deadlines or having to deal with office politics and awkward bosses.
• Having more time to get on with your hobbies, take on new projects and travel.
• Having the time to enjoy activities if you’re fit and healthy enough.
• Less stress.
• Being able to spend time with loved ones and having the chance to meet new people
• No more commuting.
• The chance to get involved in other activities such as volunteering, part-time work, or assuming a consulting role.

The disadvantages of taking early retirement

• You may have to make sacrifices such as reducing your living costs or working harder to earn extra income.
• If you retire before 55, you might need to bridge and fund an income gap before you are allowed to access your pensions.
• You might feel a loss of status.
• The time your retirement savings are given to grow will be reduced.
• You could get bored and become less active.
• Having more free time could cause your expenses to rise.
• You could find returning to work difficult if you don’t have enough money.
• If your life expectancy is extended, your funds might get overstretched.
• The longer funds remain invested, the greater the chance of inflation depleting their real value. Also, there is the risk of a reduction in the value of investments due to a downturn in the stock market.

Early retirement benefit

If an early retirement in the UK was not by choice but was forced due to ill health or disability, you may be able to claim early retirement benefits from the UK government. This can be an option in certain circumstances.

If forced into early retirement due to ill health in the UK

Regrettably, if you have to accept retirement due to ill health in the UK, you won’t be able to take your state pension before the state pension age. However, you might be able to claim some other state benefits, including:

• Employment and Support Allowance
• Statutory Sick Pay
• Universal Credit

If you want to check and see whether or not you qualify for such help, you can use one of the benefits calculators on the GOV.UK website.

However, if you are forced into ill health retirement in the UK and have private pension funds outside your state pension, other options may be open to you.

Usually, if you have a workplace pension (which you are entitled to even if you only work part-time) or a personal pension, the earliest age at which you can access your pot is 55. However, some companies and pension providers can help you access your pension pots before this age, although it will be considered an “unauthorised payment.” Unauthorised payments are subject to a 55% income tax rate.

But all may not be lost. It might be possible to increase the amount you can access, but you need to check with your pension provider.

The guidance stated above also applies if you are forced into early retirement due to disability in the UK.

Other early retirement schemes

Before moving on from the early retirement benefit discussion, let’s take a quick look at the local government pension scheme as offered by the Merseyside Pension Fund.

The pension age for receiving your retirement savings from this fund is linked to the state pension age. However, you can apply for UK early retirement options from age 55 onwards. But you must meet the scheme’s 2-year vesting period (a member of their Local Government Pension Scheme (LGPS) in England or Wales for two years).

Other organisations that have voluntary early retirement packages include the NHS and Royal Mail.

How to work out your retirement income

To figure out how to retire early in the UK, you will need to know how to work out what your potential retirement income will be. Finding a good online pension calculator is what you will need.

A good example of a user-friendly independent, early retirement calculator UK residents can use is the Moneyfarm pension calculator.

Phased retirement

One answer to the question of how to retire early in the UK is to opt for phased retirement. This type of scheme allows employees to wind down slowly while taking a reduced salary and some early pension benefits as they work towards normal pension age, by which we mean state pension age.

Not all employers or pension providers offer this retirement package, so you have to enquire.

Pension options

Setting up a good pension is an integral part of planning for early retirement in the UK, especially if you’re thinking of retiring aged 55. When you ask yourself, “how much do I need for retirement” at this sort of age, you are talking serious lump sums of money. Also, you may need to set up a flexible pension drawdown so that you are open to more pension withdrawal options.

If you’re a high earner, you’ll have a better chance of retiring early, but you will need to take care not to exceed your pension lifetime allowance, or you could lose a lot of money to the taxman.

You’ll need a good self-employed pension if you work for yourself rather than an employer and want early retirement here in the UK. One of the options that might appeal is a Self-invested Pension Plan (SIPP).

Choosing the right pension takes work. There are so many products and providers around that it can be bewildering. A trustworthy financial adviser can be a big help. Also, you might find this Moneyfarm pension guide of use.

Final thoughts

The earlier you start thinking about retirement living and the lifestyle you hope to have, the better. But it’s never too late, especially if you want to join the FIRE (Financial Independence Retire Early) movement in the UK. Unfortunately, many people don’t fully appreciate the dire financial state they could be in until later in life. So 50s retirement savings reviews give you a good chance to recap your situation and, if necessary, take action.

For example, you might access your pension, withdraw your 25% tax-free lump sum and invest it elsewhere. Alternatively, you could buy up to £50,000 worth of NS&I premium bonds. With NS&I premium bonds, your money will be safe and easily accessible, and it might win you a big money prize (and there is also an option for kids)

FAQ

What happens if I retire early in the UK?

Early retirement in the UK affects several things. For instance, you could get a lower state pension due to fewer qualifying years of NI insurance contributions. This is because at least 10 years of NI insurance contributions are required to get any state pension and 30 qualifying years for the full basic state pension.

If you retire early, there is the danger of running out of money in retirement, and compound interest has less time to earn more money on your retirement savings. You can trigger a ‘money purchase annual allowance’ if you take out more than the allowed 25% tax free lump sum.

What should I consider before retiring early?

When it comes to early retirement, there are several things to consider. They include ensuring you have enough money for your desired retirement lifestyle, your estimated savings and expenses, your financial plan, and the rising cost of living that will eat into your savings. In addition, you should take into account increased life expectancy and unforeseen emergencies.

How to retire early in the UK without being penalised?

The earliest you can retire in the UK without a pension penalty is age 55. However, exemptions are permitted under certain conditions, such as ill health or if you joined a pension scheme that allows you to withdraw before age 55 (you must have joined the pension scheme before 6 April 2006).

Some pension providers offer the possibility of withdrawing money from your pension before you reach 55. However, this is an ‘unauthorised payment’ subject to taxation of up to 55%.