Early Retirement – All You Need To Know

Sometimes, you may be left with the decision: Be made redundant or decide to go for an early retirement. In this chapter, we discuss the pros and cons of an early retirement and how to know if it’s right for you.

Lost Your Job? What Can You Do? – Chapter Four

It can be a difficult time when work comes to an end. If you have been made redundant, it is doubly stressful, especially if you still have a mortgage to pay and a family to raise. However, sometimes the opportunity arises to go for early retirement, and while this may seem to be the perfect opportunity to fulfil your dreams, it can come at some financial cost.

So, is the dream of endless spare time worth the financial costs that could occur if you choose this path?

How to Retire Early

Thinking about retiring early? Retiring early begins with looking at your finances to see if you can afford to retire early. Aim to have all your debts paid off before you retire, including any bad credit loans and your mortgage if possible. Begin living below your means and focus on reducing your big expenses. Think of a backup plan which could work for you – what if you hate the unstructured days of early retirement, can you return to work?

Before you retire early, here are some points to think about;

• How much money do you need before retiring?
• Do you have debts which are not paid off?
• Have you maxed out your retirement accounts?
• Have you gotten serious about lifestyle changes?
• Do you have a retirement budget in place?

Early retirement due to ill health

First, let us look at considering early retirement due to ill health or disability. It is important to get expert advice on this matter and to consider all the available options before going down this route. All employees have various rights. If a chronic illness, such as diabetes, is making it hard for you to work your regular hours, then an employer must take reasonable steps to assist you at work. One option may involve working part-time or taking on flexible hours. An employer who has been requested to help in this way is obligated to assist as long as the request is reasonable.

If you suffer from long term ill health, some benefits can be claimed if you take early retirement. One of these is the Personal Independence Payment, and there are others for housing. If you cannot claim a full pension due to lack of contributions, the Employment And Support Allowance may be applicable.

Early Retirement – The Pros and Cons

Early retirement may be an option, but it can depend upon several factors whether or not this a good choice. If you own your home outright, have no debt and have a healthy savings account, then you can anticipate a decent retirement. However, some trade-offs will have an impact on your decision. So, looking at the advantages and disadvantages of early retirement is a worthwhile exercise before you take the plunge.

Ways to Supplement your Income in Retirement

Part-Time Work for Pensioners

After retirement, many older people choose to remain at work but on reduced hours. Alternatively, they take up a part-time job in a completely different field. This can supplement the income from your pension without making you feel so exhausted that you can’t enjoy your retirement. The added benefit is that it gives you an interest outside the home and brings you in contact with others if you feel isolated.

Using Your Home as a Source of Income

One way you could make money from your property is to take in a lodger. Having a stranger living in your home will bring its own challenges but can solve your financial problems and bring in extra cash. Make sure that you calculate how much another person in the household will affect how much you’ll pay for energy bills, Council Tax, etc. Recent changes in the tax rules mean you’re allowed to make £7,500 per year from a tenant before you need to pay tax.

You might decide to sell your property and choose to downsize. With increasing house prices you won’t be left with much of a lump sum. Still, if you move from a larger house, all your bills will be smaller.

Equity Release or Converting your Pension Pot

Finally, another way you could use your home as a source of income is to arrange an equity release. This complex financial transaction has its pros and cons, so it’s best to consult an independent financial advisor before you decide whether it is right for you.

You might choose to convert your pension pot into a (life-time) annuity or income drawdown. Like equity release, you’ll need the advice and guidance of a FCA-registered financial advisor. Guidelines of their pros and cons are available from the government’s free advisory service, Pension Wise.

Planning for Retirement

Retirement is a time when budgeting becomes more important than ever. Although your state pension increases according to inflation, your other sources of income might not. For this reason, it’s essential that you look at your retirement budget every three months. In this way, you’ll be able to take steps to increase your income, reduce your non-essential expenses or both before the situation gets out of control. Here are a few tips on how to estimate your income and expenses to make your budget as accurate as possible:

1. Work out your Retirement Expenses

   You should start thinking about your retirement at least a decade before you reach retirement age. The two questions you must ask yourself are ‘How large an income will I need?’ and ‘How much must I save beforehand to give me that level of income?’

   Statistics would suggest that you need to have a half to two-thirds of your final salary to maintain your current lifestyle. If you’re prepared to economise on some categories where you used to spend money when you were in paid employment, you can manage on less. Budgeting is necessary but not so much that you can’t maintain a decent standard of living. Before you can make this decision, you need to have a clearer idea of how much you’ll have at your disposal.

2. Calculate your Income

   • Check your State Pension

     Did you know that according to the charity Age UK, £3.5 billion remains unclaimed every year quite simply because older people don’t know what they’re entitled to? How much you’ll receive from the government will depend on your National Insurance contributions over your years of work. To be eligible for a full state pension, you need to have worked or been accredited with N.I.contributions for at least 35 years. To find out how many you have, you can request a statement, which will inform you if there are any gaps in your record.

   • What if you have Gaps in your N.I. Record?

     If you lack the necessary number of N.I. contributions, then you can opt to make voluntary contributions to fill in the gaps. Alternatively, you might continue to work and defer your retirement for a few years. If you do so, your pension will increase by 1% for every 9 weeks you delay retirement (the equivalent of 5.8% annually).

   • Estimate your Private Pension Schemes

     If you have contributed money to a defined benefit pension scheme, then you should receive an annual statement letting you know of your savings and investments. Remember to include this sum when you’re calculating how much money you’ll have when you retire. In the last ten years before you retire, any investments should be lower-risk. Some pension funds will make this switch automatically, For others, you’ll have to notify them.

     

     Pension Tracing Service

     Lost track of any pensions you had early in your career? If so, you can use the government’s Online Pension Tracing Service. This is a governmental service and is completely free of charge (and not to be confused with some private companies which charge a fee for their services).

     Phone Number 0845 6002 537
     
     

3. Clear your Debts

   Apart from checking your income, another thing you should do in your final years of work is to clear as many of your debts as possible. If you had a standard 25-year mortgage, then this will no doubt be paid off in the years before you stop work. Apart from your mortgage, you should budget so that you’re also able to clear any other debts such as personal loans and credit cards. You should start with the ones with the highest interest rates and work your way down the list. The benefit of this is that you’ll save money and have fewer expenses when your income is smaller.

Conclusion

One of the most important factors to consider before taking early retirement is to think about how you are going to fill your days. If you do not have an interest in a particular hobby, you could find yourself with time on your hands and nothing with which to fill it except TV or gardening. Before going for your early retirement, you might want to get some advice from the pension advisory service who offer free, independant guidance on pension matters and can help resolve any problems you may have with your pension.

Additionally, taking early retirement is sometimes a trigger for adult children to use you as an unpaid babysitter. As our life expectancy is continually going up, the government has seen fit to raise the pension age – this is for a good reason. Unless you have a life plan in place that allows for early retirement, it is probably a better option to reduce your hours gradually at work until you are ready for final retirement.

Chapter 3:
Statutory Redundancy Payments

Chapter 5:
The civil service compensation scheme