6th August 2019
The age-old question - "when should I retire?" - becomes even more complicated if you want to retire before your state pension is due to kick in. If you want to optimise your income in the interim, you should speak to an independent financial adviser to better understand your options.
Let's take a recent client of ours to illustrate the different ways in which you can take your pension, and when.
What if I want to retire before my state pension kicks in?
Mrs B, aged 60, wanted to retire. Her state pension would not commence until she reached age 66, meaning her other pensions would need to support her for the 6 years between retirement and state pension age. Her own pension fund sat at £255,000.
However, Mrs B’s husband was already retired and the two were living within their means using a combination of the husband’s pension and Mrs B’s income.
Mrs B spoke to us and stressed that she wanted to receive some independent income as tax efficiently as possible for the 6 years before her state pension would kick in. Her aim was £15,000 per annum.
We were able to come up with a solution. Using Mrs B’s £40,000 worth of savings, we invested £12,000 into her pension. This immediately increased her gross pension contribution to £16,000. Another £4,000 was reclaimed through her tax code.
This enabled £20,000 of gross income, which paid 40% tax, to be reclaimed. Mrs B’s pension had increased to £271,000. We transferred it to a flexi-pension – a type of drawdown that allows you to access pension funds whenever you need to.
When the new tax year rolled around, Mrs B was not earning any income as she had retired. Therefore, she was able to take advantage of the personal allowance of up to £12,500 tax-free income from her pension.
Mrs B took £15,000 per annum from her pension tax-free by taking £12,000 taxable income tax-free and then £3,000 25% tax-free income. She will continue to do this for the next 6 years until her state pension commences.
Overall, we helped Mrs B reclaim £8,000 in tax relief, boosted her pension fund, and took £15,000 from her pension fund per annum, tax-free, of which £12,000 is taxable income.
Of course, Mrs B’s situation is not applicable to everyone. We will now take you through how you may be able to retire early, if you believe this is right for you.
What are the pros and cons of retiring early?
As with any situation related to income and later life planning, retiring early has its advantages and disadvantages, and these will vary from person to person.
- Whether you are looking to retire early because of your health, or simply because you believe it is right for you to finish working at your current age, make sure to consider the following:
- You will likely receive a smaller pension, even if you consolidate. As you’ll have worked for a shorter period of time, you may find your employers’ pensions do not add up to the pension pot you might get if you worked until retirement age.
- You will not receive state pension straight away, and you may be too young for a workplace pension to start paying out. Most workplace pensions do not allow withdrawal before the age of 55, while the current State Pension age varies between 62 to 66 depending on when you were born.
The earlier you start taking your pension, the longer it will have to last. Remember that your pension may not only have to support your lifestyle, but also any future Long Term Care or Later Life fees. The earlier you start taking your pension, the less you will have to work with should you live to an old age.
How much income will I have if I retire early?
As illustrated in the case of Mrs B above, some movement from savings to pension pot was necessary to substantiate an income of £15,000 per annum for the next six years. As part of that, we helped her minimise tax liabilities, which become far more complicated now that you are taking a pension income and not a regular salary.
To work out how much income you will have, it would be best to speak to an independent financial adviser. After all, you may be looking at receiving incomes from more than one pension, as well as from benefits, a part-time job, or savings.
You will need to take into consideration lifestyle changes and the effect this may have on your regular expenditures and other outgoings. For example, commuting costs may disappear, but household utilities may rise significantly.
How can I retire early?
Depending on your pension fund, and how you want to retire, you have a variety of options available to you if you want to retire early.
If you have a defined contribution pension, you will be able to take a quarter out of it tax-free, and three-quarters of it will be subject to income tax at your previous rate. You will be able to take as much of this out at any time.
Retiring completely may not be on the cards for you just yet, so you may consider phased retirement. In this case, you may be able to draw out part of your workplace pension to supplement your part-time income.
You might also be able to transfer to a personal pension, but speak to an independent financial adviser before considering this – some workplace pensions are extremely valuable and come with long-held guarantees you would lose if you chose to combine or consolidate your pension pots in a brand-new, private pension.
Who can help me retire early?
Perspective (East Anglia) is a firm of experienced Financial Advisers, delivering a professional and specialised service to individuals and businesses throughout East Anglia and beyond.