Early retirement

The basic question is "if you take early retirement will you have enough to live on at the standard of living you desire"?
This requires a number of questions to be answered.

How much money will you need in retirement?

What will your income be?

What about State benefits?

Pension income requirements?

How does early retirement impact my pension?

Shortfalls and boosting your pension?

Useful contacts?

Retiring before you are 65 is now typical. Last year some 80% of company pension scheme members retired early. Employers are often keen to offer early retirement as an alternative to redundancy. For many it is a lifestyle choice to be carefully considered with their partner. Do your research and seek professional advice.

For many employees today, early retirement is more difficult than in the recent past. Pension funds have lost tax benefits and are growing more slowly - partly as a result of all the early retirement pensions they have had to pay! Annuities (which provide the retirement income for most pensioners) are paying lower rates. Interest rates are low so investments do not provide much extra income. You will receive less income for a longer retirement period - perhaps 30 years or more!

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How much money will you need in retirement?

You need to see how your money is currently spent and then adjust the figures for when you have retired. This will produce a minimum income requirement - cash flow plan.

Try the following methods:

Whatever the method there are four main types of expenditure to consider:

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What will your income be?

How much income can be provided by your assets and investments? Do include all your assets including your property. Divide them into those you can draw upon on early retirement and those to be used for other purposes.

Do consider:

Discrimination on the basis of age is regrettably very much a reality of modern life. Changing jobs late in life can be very difficult. The majority of jobs open are going to be part time and low income. Be realistic.

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What about State benefits?

These are under pressure, and given an ageing population, are likely to decrease if anything, making past benefits seem generous! A State pension will not be available until you are 65 (or 60 if you are woman born before 6 April 1950). You currently need between 40 and 44 years of National Insurance contributions, or credits, to qualify for a full pension. Early retirement could affect your State pension unless you pay some class 3 voluntary National Insurance contributions. To see how much State pension you qualify for, and how much you would get if you retired early, contact your local DSS office or the Retirement Pensions Forecast Unit, contacts below.

Inland Revenue rules for company pensions allow for early retirement from age 50.

Incapacity Benefit will not automatically be paid to people retiring early with company or personal pensions. The Pensioner's Income Guarantee of £75 a week only applies to people over 65 whose pensions pay them less than this.

Pension Income Requirements?

Subtracting the estimated income from your estimated outgoings gives you the amount you will need from your pension(s).

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Early retirement affects your pension in two ways:

The earlier you retire the more difficult it will be. If you work for 40 years you may qualify for a maximum company pension of two-thirds your salary at age 65. If you retire ten years early at age 55 then you have got 25% less time to accumulate a pension fund and could end up with only 45% of your salary at time of retirement. You therefore also miss out on a potential 10 years salary growth. Depending on the pension scheme your pension value could fall further due to other penalties and reductions. Each pension scheme is different.

Final-salary company pensions (increasingly rare)

Your pension is calculated as a fraction of your salary at retirement - often 1/60th - for each year you are a scheme member. Early retirement gives you fewer years of membership and hence a proportionately reduced pension. A further reduction (typically 5%) is made to account for the fact that the pension will have to be paid to you for longer. It will vary according to each scheme's rules. Your personnel department should advise you in writing of the details of any special early retirement deal.

Money-purchase company pensions:

Your pension depends on the value of your contributions in the pension fund and the annuity that they can buy when you retire.

What's an annuity? An annuity is a special policy which you must buy with your pension funds. Sorry - you can not blow your life's pension funds on an orgy of spending. The government will not let you! An annuity provides you with your day to day income for life in return for the lump sum from your pension fund.

Early retirement gives you fewer years of contributions and fewer years for them to grow. Retiring ten years early means ten years' contributions lost and in that ten years the fund could have doubled, producing perhaps double the pension. If you need your pension income immediately you will also have to buy an annuity at a younger age - when annuities pay far less (ten years early perhaps 40% less).

Personal pensions:

If you have a personal pension started after 1 July 1988 you can retire at any age between 50 and 75. If you took out a personal pension before 1 July 1988 (a retirement annuity contract) you can retire from age 60. To retire earlier than this you have to convert your contract into a personal pension which may have financial costs and lose pension benefits. Personal pensions are affected similarly to Money-purchase company pension above. Shortfalls?

This is likely especially if you had not planned for early retirement. You need to compare the benefits of any special early retirement deal with all the alternatives.

Boosting your pension?

Any special early retirement deal may be open to some negotiation especially if you can show how disadvantaged you might be.

In a final salary company pension you may be able to 'buy' added years.

You can often pay into an additional voluntary contribution (AVC) scheme through the company or a free-standing scheme. An AVC scheme can only buy you another annuity and annuity rates are likely to remain low for the next couple of years.

If you plan to retire in the next two to three years you may be better off using other investments eg ISAs.

If you have a personal pension, you can pay in more - up to the Inland Revenue age-related contribution limits. You can use carry-back and carry-forward rules to make up for past years when you did not contribute.

On retirement, you could use an income drawdown plan, to draw an income from your pension fund while you wait to buy an annuity. Annuity rates could go up or down. The older you are the better the annuity rate you are likely to get.

You do not have to purchase your annuity from your pension plan provider - shopping around could well give you a better deal.

The sooner you start planning your pension and investments and take action the better.


Always contact your scheme(s) administrators and ask for a projection of benefits at the age(s) you are considering retiring at. Get professional advice in this complex area.

Useful Contacts

Retirement Pensions Forecast Unit:

Form BR19 Application for a Retirement Pension forecast
Benefits Agency,
RPFA Unit,
Pensions and Overseas Benefits Directorate,
Newcastle upon Tyne,
NE98 1BA
Tel:0191 218 7280

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