Early retirement explained

Early retirement is something many people consider, or at least, it’s something that many people would like to consider, and for a variety of reasons. If you want to retire early, it’s worth reviewing your finances sooner rather than later, and considering how retiring early will affect your lifestyle. On this page, you’ll learn what early retirement is, how much you might be able to retire on and your other retirement options.

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The rundown
  • Early retirement means you’ll stop working before the official retirement age, commonly sometime in your fifties
  • If you want to retire early, you’ll need to make sure you’re financially stable enough that it doesn’t greatly impact your lifestyle
  • The amount you’ll receive from your pension pot depends on the pension scheme you’re in, and your state pension depends on the number of qualifying years you’ve worked

What is early retirement?

Early retirement means finishing work when you’re younger than the official retirement age. The retirement age in the UK is currently 65 for both men and women. You can consider any time as early retirement if you retire before you’re 65 (or even later, as the pension age is increasing).

What should I consider if I want to retire early?

When people think about retiring early, things that typically spring to mind are lying on the beach, enjoying golf, spending more time with family and other leisure activities. While this paints an enticing picture, it’s important to tick off an early retirement checklist so you can determine if you’re financially secure enough to retire early

The first thing you might want to do is calculate your income if you retire early, and can no longer rely on a salary. If you’ve planned ahead and created other sources of income aside from your pension, this will mean you’re likely to be more financially stable. Take every income stream into account, whether that’s your workplace pension (you may have more than one), savings, investments, and anything else.

You’ll also need to calculate and plan out your budget. As you might predict, your expenditure will probably be different from when you were working. For example, you may be cutting costs incurred by travel and lunches, but your household utility bills may go up since you might be spending more time at home. 

Another thing you should consider is finding out when you can start claiming your state pension. State pension age is gradually increasing, reaching 67 by April 2028. You can check your state pension age on the UK government website – all you need is your date of birth. 

What are the pros and cons of early retirement?

Pros Cons
Taking early retirement allows you to seek new opportunities, volunteer, or even move into a new field of employment. If you’ve dreamed of working on something else entirely, this is sometimes the best time to consider it. Access to your pensions may be limited, and if you’re allowed to claim early, it may be less than you’ll receive once you reach state pension age.
Early retirement means you can start travelling the world. Many new retirees also relocate abroad to enjoy sunnier climes. You won’t have access to your state pension right away, because the earliest you can claim a state pension is in your early sixties or later, depending on your date of birth.
Another reason people consider early retirement is to spend more time with their friends and family. You can spend more time with your grandchildren and enjoy watching them grow up. Your level of income might be dramatically different and could take some getting used to.

How much will my pension be if I take early retirement?

The amount you’ll receive from your pension will depend on how much you’ve paid in, how well the investments have done and how you decide to take your money. In most cases, you can take 25% of your pension pot tax-free. Your pension provider will be able to tell you how much you can take out if you retire early, and when you can take it. 

When it comes to your state pension, you’ll need to have worked at least 10 National Insurance qualifying years to receive any income. For the full state pension of £175.20 per week, you’ll need to have worked for 35 qualifying years. 

You can calculate how much you’ll receive if you retire early based on this full amount.

For example, let’s say you’ve worked for 15 qualifying years before taking early retirement at age 62. You’ll need to divide £175.20 by 35 (the full number of qualifying years), then multiply that sum by your 15 qualifying years. 

The calculation is as follows: £175.20 / 35 = £5.006. £5.006 x 15 = £75.08. 

That means you’ll receive a state pension of £75.08 per week when you retire. 

What are my pension options?

Depending on the pension scheme you’re in, there are few pension options you can consider when you retire early. 

  • You might want to leave your pension untouched and delay taking it out for a later date. If you leave your pension as it is, the pot will continue to grow tax-free, and potentially provide you with more income when you access it in the future. 
  • Since you can withdraw up to 25% of your pension pot tax-free, you can use this amount to purchase a guaranteed income for life, or an annuity. There are different lifetime annuity options and features you can choose from. 
  • Another option is to take small sums of money from your pension to cover your daily expenses or needs. You can then leave the rest of the pot untouched, so it can continue to grow. There may be limits on how many times you can make withdrawals, so it’s important to ask your pension provider about this. 
  • You can also take your whole pot as cash, however, there are risks involved in doing this. One high risk is that you’ll incur a larger tax bill. If you’re considering pursuing this option, it’s important to plan how you’ll use the money and make it last your lifetime.

Whichever early retirement option you go for, it’s a good idea to seek independent financial advice, so you can rest assured that you’ll be able to live comfortably and enjoy your remaining years without worrying about money.

What is phased retirement?

Phased retirement is when your pension pots are split into segments and treated separately. It follows a rule in the UK that allows a retirement policyholder to take each of their pension policies when they choose, rather than waiting to reach their pension age. 

If you have a workplace pension scheme, it might allow you to take out part of your pension and increase it later. If your workplace pension doesn’t allow this option, you could consider transferring it into a personal pension. However, you should consider that transferring your pension may mean you’ll be giving up certain guarantees or benefits. 

What can I do now to make sure I can retire early?

If you’ve got cash and are looking for ways to make it work hard for you so you can retire early, then investing in the stock market might be an option. However, investing has risks involved that can lead to losing some or all of your investment value. If you’re uncomfortable with risk, it may be better to consider other options. 

A safer way to save for retirement is by opening a savings account, especially one offering competitive interest rates. You won’t be at risk of losing your savings, as the Financial Services Compensation Scheme (FSCS) protects deposits into UK-regulated savings accounts.

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