Should I take early retirement?

Richard Barker is a Chartered Financial Planner Picture: Smith & Pinching (Image: Archant)

I’m 58 and have been furloughed through most of lockdown so have been able to spend more time in my garden. I’m seriously thinking about taking early retirement but am concerned that this might compromise the amount of private pension I’ll get. My fund is currently worth just over £375,000. Are you able to give me an indication of what difference that would make?

Richard Barker of Smith & Pinching responds:

It’s hugely important to understand exactly what impact your early retirement will have on your long-term finances. So much will depend on your personal circumstances such as your family, your health, your other savings and investments, your expenditure and any other financial commitments. This is a key time for you so I strongly recommend that you sit down with an independent financial adviser to help you work out the figures.

However, I can give you some general pointers. There are two main implications in taking your pension early, both of which, though quite obvious, are worth stressing.

First, it normally means that your pension pot will be worth less than it would be if you worked until your original planned pension age, as you won’t have the earnings to contribute and there is less time for your pension to get added value from investment growth. Having said that, you are permitted to continue to add to your pension savings during retirement, but the amount you can contribute in the tax year is reduced to just £4,000 once you’ve started taking flexible benefits from your fund.

The second result of taking early retirement is that your pension savings will have to last longer. If you were originally planning to retire at 67 (which I estimate will be your state pension age, given that you are 58 at the moment), then you will have to make your pension savings stretch over an additional nine years – and these will be years in which you will have no state pension to supplement your private pension.

Early retirement could have an impact on your state pension too, if your National Insurance Contribution record doesn’t have enough qualifying years to entitle you to a full state pension. You can get a state pension forecast from the government website at www.gov.uk/check-state-pension.

When taking retirement income from your pension savings, you have a choice of routes. It’s important to understand your options and how they will be affected by early retirement before taking any decisions. This is a situation where the reality of early retirement will depend on both a full analysis of your current situation and putting good planning in place. Please get detailed advice.

Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

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