How to retire early in the UK – a step-by-step guide
Almost everyone dreams of taking early retirement, from sunny Spanish beaches or long walks in the Lake District, to fine tuning their golf game or ticking off that travel bucket list.
However, these hopes are being dashed for some, thanks to increased costs and tax bills – not to mention the rising state pension age – making it more difficult to retire early than it once was. People are also living longer, meaning their pension pot might have to last for decades after they stop paying into it.
Here, Telegraph Money explains everything you need to know about how to retire early and how much money you will need to live the retirement you want. We will cover:
What constitutes early retirement?
The state pension age has long been considered the age at which people normally retire. Currently, this is 66 for everyone, regardless of gender. Stopping work before this could be considered early retirement, although you can start drawing private pensions from the age of 55 (rising to 57 from 2028).
In some cases, pension providers offer a “protected” pension age, so the age at which you can access your nest egg may be fixed, even if the Government rules change.
However, just because you can access a pension, it doesn’t mean you should. At this stage, your pension may not be large enough to fund a long retirement – especially if you are tempted to take your tax-free 25pc cash lump sum.
What is needed to retire early?
Simply put, you will need enough money to live on for the rest of your life. For men, the current life expectancy in Britain is 79, whereas it’s now 82 for women. Unless you have enough funds to sustain you for all those years – and maybe more – it may not be wise to stop working early.
Clare Moffat, of Royal London, said: “Early retirement sounds great but poses risks; the more pension money you use early on, the less you’ll have later. However, younger workers benefit from time and investment compounding. Early planning and realistic saving goals can help build wealth over time to achieve retirement dreams.
“The best preparation for your long-term future is to start saving as early as you can. Starting saving as soon as you start working gives your money the maximum time to grow. Putting it off until you think you can comfortably afford it may be a few decades in the future.”
Daniel Swift, of Close Brothers Asset Management, also sees planning as hugely important.
He said: “The earlier you can start planning, the better. It is important to consider the difference between the expenditure you will need in retirement, versus during your working life. What areas will you need more money for, and in what areas will your expenses likely reduce?
“When retiring early, income streams such as different work or personal pensions and the state pension will often kick in at different points. This should be factored into your retirement plans, and it is important to consider how to plug any gaps until all income is being paid.
“Remember, a retirement plan is not one set in stone for the whole of your retirement. It will need to be reviewed regularly in line with changing rules, market conditions, and changes to your own circumstances.”
Pay off your debts and mortgage
Many people are debt-free in retirement, and being in that position can make it easier to work out how much money you’ll need. If you’re not able to pay everything off before you retire, it will increase how much you need in retirement as you look to meet the repayments.
If you do have debts, Nicholas Nesbitt, of advisers Forvis Mazars, said it’s important to have a plan to clear them.
He said: “Trying to retire early while you still have debts is going to be problematic as it’s likely that those debts, through interest and repayments, will increase your outgoings and your reliance on your retirement savings.
“Making adjustments to your mortgage repayments from an early stage will have a pronounced effect on when the mortgage is cleared. This leaves you free to focus simply on what you’ll need to enjoy your desired standard of living.”
Using the 25pc tax-free lump sum from a pension is a common method to pay off remaining mortgage debt. You can currently take this from 55 with most pensions, but it should be a decision you think very carefully about.
Drawing your lump sum too early can mean your pension misses out on a significant amount of growth over a number of years. For example, your pot might be growing at a rate that’s higher than the interest rate on your mortgage.
You should examine your options carefully and consider financial advice for major decisions.
Check your state pension forecast
A key consideration is when you can expect to receive your state pension. The state pension age is currently 66, rising to 67 between 2026 and 2028. There is another legislated increase to 68 sometime during the late 2040s, but this could be brought forward.
It means that someone in their 50s now should brace themselves, and start preparing for a slightly longer wait.
Remember, you will only qualify for the full state pension if you have 35 years of National Insurance contributions. This will vary according to your career history, so it is always best to check beforehand.
Claire Trott, of St James’s Place, said: “The foundation of a good retirement plan is the state pension. While it usually won’t affect early retirement due to the age at which it can be accessed, it will mean you may need less private income to sustain your lifestyle later in life. If you don’t have a full state pension, it’s wise to explore options to top it up sooner rather than later.”
Ms Moffat added: “A state pension forecast will tell you when you reach state pension age and how much you’re on track to get as weekly, monthly and annual amounts.
“It’s worth checking your forecast from time to time, especially if you have been contracted out at any point. You might have been contracted out if you worked for an employer before 2016 and joined their pension scheme. This was particularly common with public sector final salary pensions, but used to be the case with some private sector pensions as well.”
You check your official state pension forecast on the Government website.
Fill in gaps in your National Insurance record
If you aren’t on course to get the full state pension, you can make voluntary National Insurance contributions (NICs). These are a payment from you to the Government to top up missing years.
By adding enough to complete a year, you could add up to £328.64 to your annual state pension income. This lasts as long as you live.
Ms Moffat said: “Filling in any gaps in your National Insurance record by paying for voluntary NI [contributions] can be money very well spent. However, not everyone with an incomplete National Insurance record will benefit by doing so.
“For most people, the easiest way to see if you have gaps in your National Insurance record, and whether it is worth making voluntary NI contributions, is to use the government’s online National Insurance tool.”
Track down all your pensions
Since 2012, the Government’s auto enrolment rules have meant almost everyone joins their employer’s pension scheme unless they opt out. Around 10 million people have been auto-enrolled since its inception.
However, people are also much more likely to move jobs these days, meaning they will have lots of small pensions instead of just one. Currently, it’s estimated that around £50bn is held in lost pension pots. This means you could have pension income that you’ve completely forgotten about – and finding it might help you retire earlier.
It’s worth going through your work history and making a note of when you worked there and for how long. If the company is still operating, you could contact them and find out which pension scheme you were part of if you’re not sure and haven’t kept your contact details up to date.
Increase pension contributions
Speak to any financial advisor about how much to pay into your pension and they will generally say “as much as you can”. However, the actual amount each person earns and can afford to pay in is different.
Ms Moffat said: “Many people find it challenging to save enough for retirement due to competing financial priorities, such as purchasing a home, raising children, and covering daily expenses that quickly consume disposable income. Fortunately, it’s never too late to boost your pension fund, either by upping your regular pension payments or making one-off contributions.
“If you receive a bonus, it can be very tax efficient to pay that into your pension. Also, if you have finished paying off your mortgage then this may mean you can now pay more into your pension. This could mean that you reduce your tax bill too as pension contributions reduce your taxable income.”
There are also other ways to boost your pension pot without necessarily paying more in yourself.
Mr Nesbitt added: “For employees it is generally advisable to make contributions through their workplace pension as most employers now operate salary sacrifice schemes. This means that the individual effectively saves the income tax and NICs on the contributions they make, with some employers also sharing some or all of their employer NIC savings.
“This can mean that for a basic rate taxpayer, for each £1 they sacrifice they are giving up 72p in their pocket for up to 113.8p in their pension if the employer shares all of their NIC savings. For higher rate taxpayers, they are giving up 58p for up to 113.8.”
Maximise employer contributions
By law, the minimum workplace pension contribution is 3pc from the employer and 5pc from the employee. However, many employers will pay in more – but, sometimes, only if you do.
Ms Moffat added: “If you’re only contributing the minimum amount to your pension, you might be missing out on additional funds from your employer. It’s a good idea to check with your employer to see if they will match extra contributions you make into your pension pound for pound.
“If they do, evaluate if you can afford to contribute more to take advantage of that matching to help you build a larger pension fund for your retirement.
“Not all employers offer a matching benefit, or they might do so but only up to a certain limit. You can find out if it’s available and the maximum amount by speaking to your company’s benefits or HR department. Even a modest increase in your contribution could save you thousands more for your life after work, especially if your employer matches it.”
Consider opening a Sipp
A self-invested personal pension (Sipp) is a type of private pension, but offers more flexibility over how it’s invested. Simply put, you choose what you invest in and make changes whenever you want. It also offers different options for savers, but comes with its own set of risks and rewards.
You’ll still get tax relief in the same way as you do on a workplace pension for example, and it’s possible you’ll make more money on your investments. However, the money you invest can also go down, leaving you at the risk of running short.
William Stevens, of Killik & Co, said: “Sipps allow you to invest in a much broader range of assets than conventional workplace pensions. You are able to consolidate other pension schemes into Sipps, making them preferable for those looking to take greater control of their pensions.
“[However] it is also worth noting that the rules around Sipps are far more complex than those surrounding other investment accounts and the constant rumours about potential changes could make them subject to change in future.”
Make the most of pension tax relief
Your pension contributions will usually attract the same amount in pension tax relief as you pay in income tax.
For instance, if you earn £20,000 a year and put £2,000 into a pension, it will actually only cost you £1,600 because the government adds the extra £400 – this 20pc tax relief matches the 20pc basic-rate income tax you pay. This will be done automatically.
Higher rate taxpayers receive 40pc tax relief on their contributions and additional rate payers receive 45pc, however the amount above 20pc is not added automatically. You will have to inform HMRC of this – possibly by submitting a tax return.
Will your pension last throughout retirement?
When deciding whether to retire, what really matters is whether your pension will last for the rest of your life.
If you are aiming to retire before you reach state pension age, it’s likely that most of the money you’ll need will come from your private pension funds or other savings. It is hard to deem exactly how much you will require, as this will ultimately depend on the kind of lifestyle you want, and your health.
Jonathan Watts-Lay, of retirement specialists Wealth at Work, said: “People should start by working out what they think they will need to meet their day-to-day living expenses, such as household bills, and discretionary expenditures, such as holidays and hobbies, in retirement.
“Current outgoings are a good place to start when working this out. In retirement, many will probably be paying significantly less income tax, no National Insurance or pension contributions, and mortgages may be paid off – but other costs may be higher, such as heating bills as retirees may spend more time at home.
“They then need to work out the value of their savings and investments, including pensions.”
For people who retire at state pension age, a frequently cited rule of thumb is to multiply your salary by at least 10 in order to get a ballpark figure for how large your fund should be. For anyone who wants to retire early, this will have to be even bigger – possibly around 30 times your current salary.
Helen Morrissey, of the broker Hargreaves Lansdown, said that it was important to keep a cash buffer around your life expectancy, as living longer than expected could cause serious financial strain.
She said: “If you retire at 55, you could be living until you are in your 90s, and anything could happen during that time. We could see inflation shocks that push up prices and have the potential to undo your retirement planning, so you could for instance decide to keep a portion of your pension invested so it can grow or you may even choose to return to work for a period of time.”
If you’re not sure how your pension savings will fare, it’s worth checking our calculator which shows how long your pension will last.
This article was first published on March 21 2023 and is kept updated with the latest information.
