7 steps to taking early retirement

Rachael Oku

by , Writer

at PensionBee

08 Mar 2018 /  

7 steps to taking early retirement

Everyone fantasises about quitting their job and retiring early, but few can make their dreams a reality. If you’re serious about cashing out on your career, you’ll need to put a savings plan in place, and soon. Here are seven things you can do now to put your finances in the best possible position for the future.

How to retire early

1. Calculate how much you’ll need to save

An online pension calculator can help you figure out how much you’ll need to save to be able to retire at a specific age. If you want to retire at 60, for example, with a retirement income of £30,000 a year, all you need to do is input these details into the calculator, along with your current age and savings total.

It will calculate how much you’ll need to save between now and 60 to reach your £30k target. If the results aren’t what you were hoping for and the amount you’d need to save each month is too high, try inputting a slightly higher retirement age to see what’s achievable.

2. Increase your pension contributions

Once you’ve identified how much you’ll need to save each month, it’s likely you’ll need to increase your pension contributions. It’s easy to adjust the amount you pay into your workplace scheme or personal pension, and you should pay in as much as you can afford to sacrifice from your salary.

You should pay in as much as you can afford to sacrifice

If you’re serious about retiring early you’ll need to budget and tighten the purse strings in order to resist excess spending. There’s a range of money saving apps that can help you get your finances under control so any spare money can go into your pension.

While short term cash injections can really help your pension grow, it’s worth remembering that higher regular contributions will have the most significant impact.

3. Increase your employer’s pension contributions

If you have a workplace pension, it could be possible to increase the amount your employer pays in by fully embracing Auto-Enrolment. From 6 April 2018 it will be a legal requirement for your employer to make a minimum contribution of 2% of your annual salary through Auto-Enrolment. Depending on the nature of your workplace scheme, it may be possible for your employer to match your contributions to a set amount. If contribution matching is on offer, increasing the amount you save into your pension will help unlock higher contributions from your employer.

If it’s not possible to increase your employer’s contributions in your current workplace, it might be a good opportunity to shop around and see what other employers are offering. While changing your job won’t always be possible in the short-term, increasing your salary and pension contributions is a great way to help you get closer to your retirement savings goal, faster.

4. Find your old pensions

No matter how short your career, it’s likely you’ll have had more than one employer, which means more than one workplace pension. If you can’t remember where the old ones are or how much they’re worth, you’ll need to track them down.

The government’s Pension Tracing Service lets you enter some basic details about your old employer to help locate the contact details of the pension provider. You’ll have to contact them individually to find out how much your pots are worth and to update your contact details.

It’s much better to have sight of how your money’s performing

Whatever you do, don’t fall into the trap of thinking that you’ll be pleasantly surprised the longer you leave your pots to grow, as this isn’t always the case. It’s much better to have sight of how your money’s performing so you can make informed decisions on how to manage it.

5. Check how much you’re paying in fees

The more old pensions you have, the more you could be paying in fees so it’s a good idea to check your statements regularly. While fees will vary from provider to provider, you can expect to pay an annual management fee for each one as a minimum.

Less standard is an inactivity fee which is charged when you don’t make any payments into your pension over a set timeframe. This means that you could be being penalised for not making regular contributions, and your pensions could be shrinking without your knowledge. In the worst case scenario, fees like these might leave you with with nothing at all…

Elsewhere, when you close each of your old pensions you may face an exit fee - typically charged to cover the administration costs for closing your account. In contrast, there’s no exit fee if you leave PensionBee at any point. Plus there’s also a 30-day cancellation policy, which means we will return your pensions to your old providers (assuming they are also willing to take them back) free of charge if you cancel your PensionBee plan within 30 days of opening it.

6. Transfer your old pensions into one pot

To avoid having lots of pensions with different providers, it’s possible to transfer all of your old pensions into one. PensionBee can help you track down and combine all of your old pensions and consolidate them into one simple plan.

From here you’ll be able to track the performance of your money much more easily and will only have one fair fee to pay. It won’t always makes sense to transfer them all into one plan - particularly if you have a defined benefit pension or two - but it can make sense if you’ve gots lots of disparate defined contribution pots, being eaten away by hefty fees and poor performance.

7. Make sure you’ll qualify for the full State Pension

While your State Pension will be off limits until you reach the State Pension age (66 for men and women by the end of 2020, rising to 67 by 2028), you’ll want to make sure that you receive the maximum amount when the time comes.

To qualify for a full State Pension you’ll need to have been working and paying your National Insurance for at least 35 years or have a good reason why not, in which case you’ll qualify for credits.

Most people will automatically meet the requirements, but it’s sensible to double check your State Pension eligibility well in advance of your retirement. If you haven’t paid enough, you can top up with voluntary National Insurance Contributions. Plus National Insurance credits can be claimed for periods of unemployment, sickness or parental and care leave.

Can I retire early?

Once you’ve started digging into your savings and have a clearer understanding of your pension you’ll be able to decide if you really are in a position to retire early. The longer you leave it before you start investigating, the more you’ll likely need to save each month to get yourself back on track.

But what if you are on track? what’s the earliest age you can start accessing your pension?

Early pension release

While the age at which you get your State Pension is non-negotiable, it’s possible to access your workplace or personal pension earlier. The law changed in 2015 so that those who’ve reached their 55th birthday can take greater control of their savings and access their pension.

You’ll be able to withdraw a portion or all of your funds via drawdown and can use your money to purchase an annuity, or spend as you see fit. No matter how big your pot or what you decide to do with it, you can take the first 25% as a tax-free lump sum. If you’re under 55 you won’t be able to access your pension.

Beware of early pension release scams

Unfortunately there are several early pension release scams targeting those approaching retirement so if you’re contacted by a company out of the blue, claiming they can help you access your pension even earlier than 55, it’s unlikely to be trustworthy.

Don’t give out any personal details about your pension and don’t be fooled by a good sales patter or slick website. You can check the Financial Conduct Authority register to see if a company’s regulated and there’s also an Financial Conduct Authority warning list which gives details of unregulated companies you should avoid.

Are you on target to retire early? Tell us your tips in the comments!

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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