Your guide to an early retirement.

What does early retirement mean?

Early retirement can mean different things to different people. Traditionally in the UK, people retire around the age of 66 in the UK, when you can begin to use your State Pension as income (rising to 67 in 2028) [1]. Early retirement could therefore be any time before you reach your pensionable/State Pension age.

Retiring early can offer more years of leisure and personal fulfilment – but it also means your savings need to last longer. This is why careful financial planning is essential to helping you reach your own person long-term financial goals.

The importance of goal setting for an early retirement.

When planning for early retirement, you need to know what you’re aiming for. To do this, you need to think about the age you’d like to retire, how long you envision being retired for, your ideal retirement lifestyle, and the total pension pot you’ll need to support your dream future without running out of money in retirement.

For example, the 4% rule is a popular strategy that suggests retirees can safely withdraw 4% of their pension in their first year of retirement. They can then withdraw the same figure, adjusted for inflation, each year for the next 30 years [2]. To put this in perspective, if you retire with a pension pot of £400,000, you could safely withdraw £16,000 in your first year and potentially the same amount, adjusted for inflation, across the following 30 years.

Once you have an idea, you can set a goal which will help you financially plan for the future by outlining if you’re ahead or behind where you need to be to reach your goal, and if you’re regularly contributing enough to support the growth of your retirement to your goal.

Once you have a goal set, you can then proactively check whether you’re ahead or behind your target and manage your pension contributions accordingly.

It’s important to note that you can’t access your pension until you’re 55. With investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest.

Understanding your retirement expenses.

Each extra year of early retirement will require your savings to last longer. Your retirement income will need to be enough to support your spending as you might be earning less than when you were employed.

When it comes to your pension, if you choose to retire earlier, you may receive a smaller pension than if you worked until the normal retirement age. However, in some cases, your employer could offer an enhanced package, such as a Defined Benefit Scheme. Therefore, you may wish to speak to financial adviser before making a decision on your retirement plans. Equally, once you start to withdraw from your investment pots the potential compound interest growth on the overall fund will reduce.

You should consider the lifestyle you want in retirement and the costs that will come with this when planning your retirement expenses. This can include:

• Household bills
• Transport
• Health and personal care
• Family
• Fitness and wellness
• Holidays and leisure

Income support from the State, workplace and private pension pots. 

The full New State Pension increased by 8.5% to £221.20 a week or £11,502.40 a year for the 2024/25 tax year [3].

To qualify for the New State Pension, you must have paid or been credited with National Insurance contributions. These contributions are typically made through employment or self-employment.

You can claim the new State Pension [4] when you reach State Pension age if you have at least 10 qualifying years of National Insurance contributions and are:

• A man born on or after 6 April, 1951
• A woman born on or after 6 April, 1953

If you were born before these dates you’ll get the old State Pension instead.

While the State Pension can only be accessed at age 66, you can begin withdrawing from your workplace or private pension pots from age 55 (rising to 57 in April 2028). This is often seen as an early retirement age as it is before your pensionable age [1].

Most people are automatically enrolled into a workplace pension by their employer once they turn 22 and are in employment. In contrast, a private pension is one that you set up and contribute to independently, giving you more control over your retirement savings. Both options could provide valuable income support before your State Pension begins.

Building your retirement savings.

Growing your retirement savings is key to securing enough income for an early retirement. The more you save now, the more comfortable your future can be.

One effective way to boost your retirement savings is by making the most of your tax-free contributions. Every tax year (from April 6th to April 5th), you can contribute up to £20,000 into an ISA and up to £60,000 into a pension without paying tax on these amounts. Any contributions beyond these limits are subject to income tax at your marginal rate. To potentially get the most out of your retirement savings, it could be beneficial to use your annual tax-free allowances before they reset at midnight on April 5^th of the tax year.

You should ensure that your contributions do not result in your total ISA contribution within the tax year exceeding £20,000, or your pension contribution within the tax year exceeding £60,000 or 100% of your earnings, whichever is lower.

Harnessing the power of tax relief.

Tax relief is valuable benefit that boosts your pension pot with contributions from the government on top of your own, based on the tax you would have paid on the income.

For basic rate taxpayers in the UK, the government will automatically add an additional 20% of your contributions. This means that for every £80 you contribute to your pension, the government will add £20, making the full contribution £100. This rises to 40% for higher rate taxpayers, and 45% for additional rate taxpayers. However, additional and higher-rate tax relief has to be claimed directly from HMRC, as it is not claimed automatically.

Maximising the tax relief on your contributions is one of the best ways to take advantage of your pension and support an early retirement. You could do this by investing extra disposable income into your pension pot with True Potential’s impulseSave® feature or reviewing your workplace pension contributions. You could use extra disposable income to potentially support early retirement by contributing it to your pension, knowing that the government will provide tax relief based on your tax bracket.

It’s important to note tax is subject to an individual’s personal circumstances and tax rules can change at any time.

How you can stay on top of your goal with technology.

Everyone’s retirement looks different, however, utilising technology such as the True Potential mobile app will enable you to track your investments, see the value of your current account, savings, credit cards, assets and liabilities all in one place. This view of your financial life puts you in control and empowers you to do more with your money.

Essentially, you’ll see everything we see, from the fund managers within your Portfolio to the asset allocation of your investments. We believe the more information you have, the more likely chance you could have of reaching your long-term financial goals.

With the use of technology, you can invest small amounts little and often. This could allow you to build up a larger sum over time while getting into the habit of regularly contributing to your investments.

It can be easy to put this off, especially as your retirement can seem so far away and you’d likely prefer the short-term benefits of the extra money. However, over a lifetime of potential compound growth, the possible additional cash could make a big difference if you pay more into your pension as early as possible.

It’s important to remember that with investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest.

When should you start thinking about retirement?

Retirement is an inevitable stage in life, so the earlier you start saving for it, the more likely you’ll reach your long-term financial goals. Ideally, you should begin thinking about retirement as soon as you start earning, whether it’s your first job, joining a workplace pension scheme, or opening a savings pot. These early decisions can set the foundation for your future retirement income.

A useful guide is the 50/30/20 budgeting rule. This suggests you allocate:

• 50% of your after-tax income to necessities like housing and insurance
• 30% to things you want, such as entertainment and clothing
• 20% to savings for your future, which could include contributions to a private pension, workplace pension, or ISA investment.

As an example, if you’re 47 and haven’t started thinking about retirement yet, you could still save enough to change your future .

If we take the average UK salary of £34,963 [5], the monthly take-home pay would be around £2,316 [6].

Following the 50/30/20 rule, you could contribute £463 per month to your pension or savings.

The average UK resident has £105,115 in their pension pot between the ages of 40 – 49 [7]. So, if we combine this with the monthly contributions of £463 over the next 20 years, your pension could grow to one of the below by the time you reach the State Pension age.

• £339,141 with an assumed growth rate of 3%
• £462,616 with an assumed growth rate of 5%
• £744,190 with an assumed growth rate of 8%

If we consider the above example in the context of the 4% rule (referenced in the goal setting section), with an average assumed growth rate of 5%, you could withdraw around £18,500 during the first year of your retirement, and the same figure adjusted for inflation across the next 30 years. However, once you reach State Pension age, this will add an extra £11,502.4 to your annual retirement income, reaching just over £30,000 a year.

It’s important to remember that your expenses during retirement may be different to your current expenses, as you may have paid off your mortgage for example. So, £30,000 a year could support a comfortable retirement income. However, everyone’s retirement savings are different and individual to them, and therefore, you may wish to speak to a financial adviser to understand how to plan for an early retirement within your own personal circumstances. Therefore, the earlier you start thinking about your retirement savings, the more likely chance you have of reaching your dream retirement.

However, if you’re starting later in life, don’t worry. Even if you’re in your 50s, it’s never too late to begin saving. Your pension could continue to grow after retirement, and with the right strategies, you could still work toward the retirement you’ve always dreamed of.

It’s important to note that investments can fluctuate in value, and you may get back less than you invest.

Considering Inheritance Tax when planning your retirement.

As you plan for retirement, it’s also essential to consider your financial legacy and what you may leave behind for loved ones. This could include passing money to your spouse, children, grandchildren, other relatives, friends, or even charities and trusts, commonly referred to as beneficiaries.

If you decide to leave your pension to a beneficiary, it will typically be exempt from Inheritance Tax as a pension sits outside of your estate [9]. This means your pension pot could continue to grow through compounding, offering further potential benefits to your beneficiaries, however, it’s important to remember that investments can fluctuate in value and you may get back less than you invest.

However, if you are over 75 when you pass away and your beneficiary decides to take a lump sum, or use the inherited pension as income, this will be subject to PAYE tax [9].

The rest of the estate is not exempt from Inheritance Tax however, and you should be aware of the potential taxes that your spouse, children or relatives may need to pay in tax upon your passing.

Inheritance Tax can be complex, and it’s a good idea to consult with a financial adviser to fully understand how your personal circumstances could affect any potential tax bill. This ensures your estate is managed efficiently and your loved ones are supported in the best way possible.

Thinking about an early retirement?

If you’re considering an early retirement, you need to understand your retirement expenses so that you set a goal and plan how you’re going to use your annual tax-free allowances, tax relief, and technology to potentially reach your dream early retirement. It’s never too early to begin planning your future and the sooner you think about it, the more likely chance you will have of reaching your goals.

If you’re a True Potential Wealth Management client and you’d like to discuss your plan for your retirement, you can speak to one of our financial advisers or call our dedicated Relationship Management Team on 0191 500 9164. They are available 7am – 8pm weekdays, and 8am – 12pm on Saturdays.

If you do not currently invest with True Potential and would like to find out how we can help you plan for your retirement and help you reach your long-term financial goals, contact one of our experts on 0191 625 0350 to get started.

It’s important to remember that with investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. Forecasts are not a reliable indicator of future results. Eligibility and tax rules apply for both ISAs and Pensions. This article should not be considered as financial advice.

Sources.

[1] www.gov.uk/government/news/state-pension-age-review-published

[2] www.gov.uk/new-state-pension/what-youll-get

[3] www.gov.uk/new-state-pension

[4] www.morningstar.com/retirement/good-news-safe-withdrawal-rates

[5] www.statista.com/statistics/416139/full-time-annual-salary-in-the-uk-by-region

[6] https://www.income-tax.co.uk/after-tax/22300/

[7] www.ifamagazine.com/uk-financial-planning-week-average-uk-pension-pot-peaks-in-your-fifties-whereas-isa-valuations-peak-in-your-seventies/

[8] Calculations were sourced from www.unbiased.co.uk/discover/personal-finance/savings-investing/compound-interest-calculator

[9] www.gov.uk/tax-on-pension-death-benefits