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

Retiring 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.” 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 Prepare for the worst have paid off your mortgage and any other debts and you Preparing for early retirement throughout your career not won’t have to pay for commuting to work. But on top of only helps to protect you from unforeseen problems, it also basic household bills you might want to travel, buy a new gives you the luxury of being able to decide when and how car, join sports clubs and enjoy an active social life. Later you want to withdraw from working. Angus says: “If you on, you might need to pay for social care. According to the make sure you are prepared financially to retire in your NHS, 841,850 people in the UK needed long-term support fifties, then any years that you work beyond that are a real bonus. You can choose “As with many in 2018/19. The majority of this was paid for by the NHS, but private individuals still whether you want to carry on working full time, gradually reduce the amount you things in life, you spent almost £34.5 billion in 2018. Working out how much you might need to do or stop work altogether. If something should always spend at different stages of your retirement happens to force your hand, you will be ready for it financially. As with many things hope for the best will help you gauge how much you need to invest to achieve your goals, whatever in life, you should always hope for the best but prepare for the worst.” but prepare for happens. It may seem rather early to be doing this, and research by Sanlam indicates The sooner you start the better. “When you are in your twenties and thirties the worst” that only 12% of people under the age of 55 have set a target for their pension savings.

Illustration: Mark Oliver @ Agency Rush

Key facts about early retirement

l The average UK adult would like to retire with an annual income of £34,0001 l You would need £903,000 in pension savings to achieve this annual income assuming you take 25% of your pension as tax free cash and use the remainder to buy an annuity at age 651 l The average UK target pension pot is £335,000, which would produce just £13,000 a year1 l High net worth individuals would like to retire on annual income of £59,000, but their average target pension pot of £677,000 will produce an estimated £24,800 a year1 l Among 55 to 74-year-olds who retired earlier than expected, 40% blamed health or physical problems, 18% had been made redundant or lost a job and could not find new employment, while 8% said they stopped work to provide care for a family member.2

Planning ahead

People in their forties have a decade to make sure their finances are in the best condition to cope with early retirement. They should make sure they are on track to pay off any outstanding debt, especially their mortgage, top up savings and investments and review pension arrangements.

“Check that there are no gaps in your National Insurance record and how much state pension you are likely to be paid. If you belong to a company scheme, make sure you are getting the maximum contributions possible from your employer,” says Angus. “By the time you are in your forties you may have worked for several employers and have contributed to multiple pension schemes, so with the help of your financial adviser, work out whether you could benefit from consolidating your pension schemes.”

Moving money from several small pensions pots to just one can reduce charges and make management easier, but it needs careful consideration. Some pension schemes may offer added benefits such as generous guaranteed annuity rates or extra tax-free cash, while others may incur penalties if the money is transferred before retirement age.

Once you reach your fifties and sixties you may feel that – thanks to all this preparation and planning – your financial position is strong enough for you to help younger members of your family. Giving money to your family and friends while you are alive is a good way to reduce the value of your estate for inheritance tax purposes.

“As with your own savings, the sooner you help your children and grandchildren start saving, the more their savings and investments will benefit from compounding – where earnings are reinvested to grow alongside the original capital,” says Angus. “What better way to set the next generation on the path to early retirement?” n

Sources 1 Sanlam, November 2019 (https://www.sanlam.co.uk/ knowledge-hub/insights/whats-your-number/ saving-for-an-average-retirement-income) 2 Just Group (https://www.justgroupplc.co.uk/~/ media/Files/J/JRMS-IR/news-doc/2020/earlyretirees-three-times-more-likely-to-be-forced-togive-up-work-than-choose-to.pdf)