The dream of early retirement is all that keeps some of us going through the daily grind. Fantasies of a round-the-world cruise, sundowners on a seaside terrace or writing a best-selling novel make work endurable.
Then we hit 50, look at our pension pot, and wonder if we will ever be able to afford to retire at all – let alone in any sort of luxury.
Despair not. With smart planning you can make your dreams come true when you are young enough to enjoy them to the full.
And it is worth the effort. The opportunities that retirement brings are limitless, with travelling or spending long periods abroad high on many people’s wish lists. A recent survey from the Share Centre, the broker, found that 71% put travel at the top of their retirement “to-do” list, with 23% planning to live abroad for at least part of the year.
Round-the-world cruises are a popular option. For other water lovers, a canal boat, sailing craft or even humble fishing dinghy would bring its own piece of heaven.
Hobbies come into their own. Some look forward to taking up a new sport or making more time for their golf or ponies. Others will be free to fulfil ambitions such as doing postgraduate research.
But all these things cost money. With pension ages rising and funding under pressure, many fear they will have to work until they drop. Certainly, retiring early and forever on a salary-style pension will be a privilege increasingly afforded a very few.
But it’s not impossible. To retire at 55 and enjoy an income for life of £20,000, you will need to accumulate a £700,000 pot on top of a full state pension. But there are ways to make whatever you have saved go further.
Here are five ways to reach your dream sooner rather than later:
Have a clear understanding about the things you want to do in retirement and dare to dream big. Then analyse the cost (monthly or annually) of that desired lifestyle to arrive at your income requirements, and from there the pot of money required to fund that income throughout your life can be arrived at. We can help you prepare this cash flow with our sophisticated planning software.
Ease yourself into retirement
Nearly half of Britons plan to glide into retirement by continuing to work part-time with their existing employer or in a new career for as long as they can.
This can be a good idea as it will enable them to pay less tax and enjoy lower working expenses, with an income coming in. If the mortgage is paid off, this may produce enough to live on without dipping into retirement savings. A variation on this theme is to continue working full time, but to negotiate with your employer an option to take regular sabbaticals as an alternative to retiring altogether.
This may appeal as it allows the company to keep your expertise, while developing the careers of younger staff who will eventually replace you. It also gives you a trial run of retirement.
Under the new pension freedoms, cash can be withdrawn from your pension (but be aware of the tax implications) to fund any big adventures. But if you are still working, it may make more sense to use tax-free ISAs or other tax efficient investments, or where possible, tax-free cash from your pension.
Save enthusiastically and young
Unsurprisingly, those who enjoy happy retirements paid for by a good pension have contributed more during their working lives, according to a report by the Pensions Policy Institute.
Healthy contributions emerged as the primary determinant of comfortable retirements from factors including charges, governance and security. So it is important to start saving early.
To retire at 55 on an annual pension of £25,000, you and your employer will need to make a combined annual contribution of £1,600 from age 25 or £1,950 from age 30. This falls to £1,233 at 25 or £1,466 at 30 if you plan to retire at 60. But for an index-linked pension or spouse’s protection you need to save even more.
Plan taking an income and tax free cash from your pension carefully
You will make your money go further by thinking about how much you will need and when. There are typically three phases of retirement. The first is ‘go-go’ when you are healthy and active and want to fulfil your dreams. The second is ‘slow-go’ when you’re still reasonably healthy but less active. Finally, you may hit ‘no-go’, where you are not so healthy or active. Income needs will typically reduce over time, so factoring this in at the start can help enable you to retire earlier.
You can boost your pension further by buying your retirement income as cheaply as you can. Topping up your state pension can be a cheaper way of buying income than purchasing an annuity.
Including the state pension in all planning can help prime-pump your income in early retirement with consideration to buying a bridging pension to fill the gap between retirement and the state pension kicking in, rather than a maximum whole-of-life annuity, which will pay the same throughout retirement.
Using “income drawdown” in the early years can also provide a higher immediate income than buying an annuity. It is riskier, though, as you will need to ride out market volatility. Buying an annuity later in life can also save money because it will pay out for less time, meaning more per year, but you forgo the pension you would have enjoyed meanwhile.
Make the most of tax breaks
Tax relief on pension contributions is currently favourable at 20% and even better for higher arte tax payers. Whilst this relief is available use government money to bolster your pension pot.
A quarter of your pension pot can be withdrawn tax-free, but after that it is subject to income tax. By combining income from a taxable source such as a pension with tax-free income from an ISA, pensioners can make the most of their personal allowances and basic-rate income tax band, allowing them to avoid higher and even basic-rate tax.
Don’t forget property
Moving to a cheaper property, region or even country can help you fulfil your dreams. Alternatively, a prime property will provide scope for “equity release” – releasing cash from your home – in later life.
Buy to let can still be a good investment if structured correctly and provide a relatively ‘passive’ income.
For more information and advice, get in touch with us today.