6 key steps to an early retirement, and why financial advice is all-important

September 2022
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You may well have long had an age in mind at which you plan to retire. You may even have started planning towards that date. This may involve you and your partner stopping work at the same time and enjoying your retirement years together.

However, given the challenges of the last few years, it would be understandable if you’ve occasionally considered retiring earlier than planned.
If that’s the case, you’re not alone. Research carried out by Aviva, revealed some of the key factors that had encouraged people to look to retire early. These included:

  • Reassessing their priorities
  • “Tired or bored” of working
  • Finding work “too taxing and stressful”.

Pension Freedoms legislation means you can access your pension funds from age 55 – rising to 57 in 2028. Although, if you have enough savings and other assets, you could retire before then.  

Before you finish working and stop earning, however, it’s important to take the right steps to ensure that retiring early is the right thing to do, and that you can afford to make a success of it. 

Here are six key steps you should take, and why financial advice could be critical in achieving your goal of early retirement. 

1. Plan ahead 
Regardless of when you want to retire, it’s important to appreciate that it’s a long-term commitment. This big life goal is something that you need to work towards and plan for. 

Leaving things to chance and ploughing on in the belief that everything will work itself out could be a recipe for disaster.

For example, the Aviva research mentioned earlier confirmed that 47% of people retiring early said their financial situation took a hit after they stopped work. 
So, make sure you do your sums and ensure that you won’t leave yourself facing financial difficulties when you stop working. 

2. Form a clear idea of how much money you’ll need 
An essential part of your planning process is to know how much money you’ll need once you retire. 

Start by separating your current outgoings into essential and discretionary spending. Then, identify expenditure that will reduce or stop completely when you’re no longer in work – commuting to and from the office, for example.

Note down any big-ticket financial commitments you know you’ll face in the coming years, too. These could include supporting your children through university or helping your elderly parents with additional financial support. 

You may also have holiday and travel plans or be thinking about having work done on your property.

Once you have any large expenditure figured out, factor in that your regular costs will increase each year in line with inflation. 

Setting out what your plans are and how much they’ll cost is an important step towards making sure you don’t outlive your money and end up facing financial difficulties further down the road. 

3. Work out how much money you have to retire on
Once you understand what your outgoings are likely to be, the next step is to work out what income you’ll have. 

The bulk of this is likely to come from your accrued pension savings. So, you should gather together current values of all your pension assets, along with projections to your planned retirement age.

Also, remember to consider other assets you may have to help fund your retirement. These could include property, savings, and any other investments you have. 

Downsizing your property may be an option, too. Selling your home and moving somewhere smaller could release a lump sum to help fund your retirement. A smaller property may also help to reduce living costs such as heating and maintenance.

Finally, don’t forget your State Pension. You can use the government website to see when you’ll be eligible to start receiving payments and how much you can expect to receive.

If there’s a mismatch between the amount you’ll need and how much you currently have, there are a couple of solutions you could think about:

  • Adjust your spending plans
  • Delay your retirement and boost the value of your retirement savings.

4. Maximise your pension contributions 
Pensions are a highly tax-efficient way to save for your retirement. You get basic-rate tax relief on all your contributions and, if applicable, higher- and additional-rate taxpayers can claim up to 25% additional relief through their self-assessment tax return.

With the valuable tax relief, it makes sense to boost your pension savings as much as you can in the approach to retirement.

If you’re planning to retire early, this adds more urgency to maximising your contributions.
You can do this by increasing the amount you pay in each month. Alternatively, you may be in a position to make a lump sum contribution and give your fund a real boost.
In the 2022/23 tax year, you can tax-efficiently contribute a maximum of £40,000 gross or 100% of your earnings – whichever is lower – into your pension in a tax year. You’ll won’t get tax relief on any contributions above this amount. 

If you’re able to pay in more than that, you can “carry forward” any unused allowance, up to the maximum, from the three previous tax years.
Read more: Everything you need to know about the Annual Allowance and Lifetime Allowance

5. Pay off or reduce any outstanding debts 
If you have outstanding unsecured debts, the high interest repayments could be a big block to your planned early retirement.

It’s doubtful that the investment growth on your pension savings will exceed interest rates on credit cards, so the debt and required repayments will be a serious drain on your resources.
So, prior to your retirement, make clearing any unsecured debt one of your top priorities.

You should also consider any outstanding mortgage you have, and factor this into your early retirement decision-making process.
6. Remember retirement doesn’t have to be a one-off event 
One of the other benefits of Pension Freedoms is the flexibility it offers you around your retirement. Effectively, it’s now possible to tailor your retirement income to suit your needs, rather than having to take a fixed amount of income from day one.

This means that one very feasible option is to “phase” your retirement. Rather than stopping work entirely, you could consider working part-time for a couple of years, or work on a consultancy basis rather than as a full-time employee. 

There are some clear advantages of this type of approach: 

  • You’re still maintaining an income so are putting less strain on your pension fund
  • As well as income, you’ll still benefit from the social and mental aspects of working
  • You can still make pension contributions, although if you start flexibly drawing income from your pension fund, the maximum you’ll get tax relief on reduces to £4,000 gross. 

By phasing your retirement, you may well find full retirement far less of a challenge – and potentially more easily affordable.

Financial advice can help boost your wealth
Two different studies demonstrate how ongoing, expert financial advice can help boost your chances of a successful retirement.

In 2019 a Royal London survey, in association with the International Longevity Centre, found that those who took financial advice between 2004 and 2006 were, on average, £47,000 better off a decade later compared with those who didn’t.

Additionally, leading investment fund managers, Vanguard Asset Management have quantified the value of investment advice to be 3% net a year. 
The table below shows the effect 3% extra returns could have on the value of your pension fund. Note that all the figures here are gross and do not take into account charges or fees.

Monthly Contribution 4% gross investment returns  7% gross investment returns
£250 a month for 20 years £91,639 £130,231

Source: Calculatorsite.com

A robust and ongoing advice process can let you know if you’re on track to achieve your goal and if you need to make changes to meet your target.
Working with an experienced financial adviser also gives you the advantage of having someone guiding you on your journey to retirement, whenever that may be. 

Get in touch
To find out more about how we can help you with all aspects of your retirement planning, please get in touch. Email clientenquiries@lebc-group.com or call us on 0800 055 6585.

Please note:
The information contained in this article is based on the opinion of LEBC Group Ltd and does not constitute financial advice or a recommendation to any investment or retirement strategy. 
You should seek independent financial advice before embarking on any course of action. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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