Pensions
What if you had to retire early? It’s important to be financially prepared because early retirement is sometimes forced upon us by circumstances out of our control, writes Jill Insley
Prepare for the worst Preparing for early retirement throughout your career not only helps to protect you from unforeseen problems, it also gives you the luxury of being able to decide when and how you want to withdraw from working. Angus says: “If you make sure you are prepared financially to retire in your fifties, then any years that you work beyond that are a real bonus. You can choose whether you want to carry on working full time, gradually reduce the amount you do or stop work altogether. If something happens to force your hand, you will be ready for it financially. As with many things in life, you should always hope for the best but prepare for the worst.” The sooner you start the better. “When you are in your twenties and thirties
retirement may seem to be something that is too far off to worry about, especially if you are saving for a deposit on a first home, paying off student debt or paying for childcare and school fees. But the preparations you need to make, such as budgeting and setting up a cash emergency fund, should be financial objectives throughout your life.” Steps to take The first steps should include building up an emergency cash fund, equivalent to at least three months of net income. Don’t be tempted to lock the money away in an account that you can’t access immediately just because it pays a better rate of interest: if you have an emergency, you will need that money instantly. The same goes for investments, says Angus, who suggests using a mixture of pensions and more accessible schemes such as ISAs. “Pensions offer fantastic tax advantages,” he says. “But you cannot withdraw your money until you reach the age of 55, so it’s also a good idea to invest in schemes that allow you to withdraw cash at any time.” Make an inventory of your income and outgoings, consider what you can cut back on and try to live below your means. Then project forward to work out how much income you might need when you retire. Hopefully you will have paid off your mortgage and any other debts and you won’t have to pay for commuting to work. But on top of basic household bills you might want to travel, buy a new car, join sports clubs and enjoy an active social life. Later on, you might need to pay for social care. According to the NHS, 841,850 people in the UK needed long-term support in 2018/19. The majority of this was paid for by the NHS, but private individuals still spent almost £34.5 billion in 2018. Working out how much you might need to spend at different stages of your retirement will help you gauge how much you need to invest to achieve your goals, whatever happens. It may seem rather early to be doing this, and research by Sanlam indicates that only 12% of people under the age of 55 have set a target for their pension savings.
“As with many things in life, you should always hope for the best but prepare for the worst”
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Wealthsmiths Summer 2021
Illustration: Mark Oliver @ Agency Rush
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etiring early while you are young and fit enough to make the most of your freedom is a dream for many people. But for some, the last year has been a nightmare because thousands of people in the UK have been pushed into unplanned early retirement, regardless of whether their finances could support the move. Research by the insurer LV indicates that the pandemic has resulted in 154,000 people in the UK aged 55 to 64 taking early retirement because of redundancy, reduced income or a desire to reduce the risk of exposure to Covid-19. More than 200,000 people say job loss or reduced income has led them to access pension savings to supplement their income, and the numbers are likely to increase when the furlough scheme ends in September. Being forced to give up work and draw on retirement savings early can have serious implications for your financial wellbeing. “It’s likely that you will have to reduce your living standards, potentially leaving you only able to pay for the essentials but unable to afford the finer and more fun things in life,” says Michael Angus, Wealth Planning Director at Sanlam. “You might even be forced to downsize your home to release equity, which could affect your ability to help your children out later in life.”
