Taking early retirement

Can you afford to retire early?

While early retirement is a lifestyle decision, it’s one that’s largely based on your finances. The longer you’re retired, the longer you need to sustain yourself without a salary – so you’ll need significant savings or assets to generate an income.

Pensions obviously play a big part in that, so the rules around your pension schemes will be key in understanding how and when you can retire.

These rules vary greatly by scheme, so for more specific help, you might want to read our guides on retiring early from the NHS pension scheme or retiring early from the Teachers’ Pension scheme.

Retiring early isn’t just about pensions though. Your other savings, investments and general financial health will form an important part of your retirement plan too.

That’s why it’s wise to start planning early - to put yourself in a position that might allow you to cut your work-life short.

Smart steps to help you retire early

Retirement means different things to different people. But it’s really just another word for financial independence. If you can meet all your expenses for the rest of your life without working, you can retire whatever age you are.

Achieving financial independence is something that usually happens quite late in life, but here are some ways you could get ahead of the game:

Pay off your mortgage 

Your mortgage is usually your largest regular outgoing. Once it’s all paid off, you’ll be in a much better position to retire. The same goes for any other debts you may have.

It’s easier said than done, of course, but considering how much interest builds on a mortgage, paying off a little extra each month can often be more effective than putting money in savings.

Just bear in mind that many mortgage lenders put limits on how much you can overpay. 

Find out more about mortgages

Your mortgage is secured on your home. Your home may be repossessed if you do not keep up repayments

Think about access

If you’re saving or investing for retirement, make sure you’ll be able to access your money when you need it.

On some savings accounts, returns can be more generous if you lock your money away for a few years – but that may not work for you if you need to start drawing an income early.

Consider your compromises 

The Retirement Living Standards website suggests a single person needs £31,300 a year for a ‘moderate’ retirement and £43,100 to be ‘comfortable’. If you’re happy with a more modest retirement, or if you’ve already paid off all your big expenses, you may need less.

These figures have risen in recent years, due in part to increases in the cost of living and an expectation to help financially support grandchildren.

Of course, the total cost of your retirement depends much on how long you will live – and that’s something nobody can predict. 

Clearly though, the less you plan to spend in retirement, the longer your money will last. So the more compromises you can make, the more realistic it is to bring your retirement forward.

For other people, a luxurious retirement will be more important than a long one.

Get advice early

Financial freedom might not be as far away as you think. It just takes a little expert help. If you can visualise what your ideal retirement looks like, we can help you on your way to achieving it.

Speak to a Specialist Financial Adviser from Wesleyan Financial Services and get a full financial review. Don’t wait until retirement is just around the corner.

When can you access a personal pension?

For most people, early retirement will be at least partly funded by various pensions. That might include personal/private pensions, workplace pensions and/or the state pension.

Most personal pension savings can be accessed from the age of 55 under 'Pension Freedom' rules. However from 2028, this will change meaning you will be unable to access your pension savings until age 57.

This change could have a significant impact on you if you’re looking to take early retirement in the next few years.

There are various ways you can take pension savings. Options include buying a guaranteed income for life known as an annuity, taking all of your pensions savings as a lump sum or flexi-access drawdown. That’s where you take out some of the funds as a lump sum, leave the rest invested or even take an income from this in the future.

How early can you take your workplace pension?

In most cases, the earliest you can take a workplace pension is aged 55. In some circumstances though, you can take your pension even earlier.

This may apply if you joined your scheme before 6th April 2006, and the scheme previously allowed its members a younger retirement age.

If you’re in a defined contribution pension scheme, you build and take your pension pot in much the same way as you would a personal pension. So, early retirement just means less time to build your pot.

In a defined benefits scheme, like the NHS or Teachers’ pension, things work a little differently.

A defined benefits scheme guarantees you a set income in retirement, based on your salary and how long you’ve been in the scheme. So if you choose to take early retirement, your annual pension has to be reduced to account for the fact it will be paid over a longer period.

If you’re due a lump sum payment as part of your defined benefits pension, this will usually be reduced too.

When can you claim your state pension?

The state pension age is currently 66 – but it’s due to rise to 67 by 2028. You can’t claim the state pension any earlier.

If you choose to retire before then, you can take your workplace and personal pensions, but will have to wait to claim your state pension.

It’s worth keeping in mind that in some cases, early retirement may result in a reduced state pension. That’s because the state pension depends on you building up enough qualifying years of National Insurance payments.

Can you still work after claiming your pension?

Taking your pension early doesn’t necessarily mean retiring early. You can start drawing your pensions and keep working for as long as you like.

In some workplace pension schemes, this opens up the potential for phased retirement – a gradual winding down of your responsibilities. In most cases you’ll have to either move to a less senior position or reduce your hours while starting to draw your benefits.

If you do decide to access your pension before stopping work completely, it’s just worth bearing in mind that you may lose more of your pension in tax.

By continuing to take a salary alongside your pension benefits, you’re more likely to exceed your personal tax allowance.

Tax treatment depends on your individual circumstances and may be subject to change in future.

Retiring early through ill health

If you’re forced out of work by a health condition rather than retiring by choice, you’ll often be entitled to take benefits from your private or workplace pensions regardless of your age.

Every scheme has its own definition of ill health, so if this affects you, it’s sensible to seek advice to make sure of your rights. To see how likely you are to suffer from illness or injury before retirement, why not try our health risk calculator?

If you're under 75 and in serious ill health (with less than a year to live), you may be able to take the whole of your pension pot as a single lump sum. Some pension providers may keep half your pension pot though, to provide a survivor’s pension for your spouse or civil partner.