Ever since the government implemented Pension Freedoms in 2015, many people have dreamt of retiring early. It’s not hard to see why, as this chapter of your life can be a great time to relax and enjoy the rewards of your lifetime of hard work.
According to a recent study published by This is Money, a quarter of Brits want to give up work at the age of 60.
If you’re one of them, it’s important to ensure that you have enough wealth to support your desired lifestyle when the time comes. With that in mind, here are five practical tips to help you retire early.
1. Consider what lifestyle you want
One of the biggest steps when planning for an early retirement is considering what you want from this chapter of your life. This is important as the kind of lifestyle you desire will play a large part in determining how much wealth you’ll need to support it.
Without having an idea of what you want to do once you’ve finished work it can be hard to estimate how much wealth you will need in the long term.
For example, a retirement spent enjoying long foreign holidays would probably cost significantly more than a quieter one spent mastering hobbies and spending time with family members.
If you want to be able to retire early, it’s important to consider the kind of lifestyle you want, as this knowledge is the bedrock of your long-term planning.
2. Check to see if you have any lost pensions
Throughout your working life, you’ve probably worked a variety of jobs, meaning that you may have several workplace pensions. Because of this, it can be easy to lose track of them, especially if it was from a job that you had a long time ago.
According to the Times, there are more than 1.6 million lost pensions in the UK, with a combined value of more than £19.4 billion. This means that the average lost pot contains around £12,000.
If you want to retire early, your pensions will need to support you for a longer amount of time, which is why it’s important to ensure that they are all working hard for you.
This is why, if you think you may have lost track of an old workplace pension, it can be highly beneficial to get in touch with old employers, who may have records of them. Alternatively, you could get in touch with the pension providers that your company worked with.
Finally, if you’re still struggling then you may be able to use the government’s pension tracing service to try and find any pensions you’ve forgotten about over the years.
Taking the time to track down lost pensions can often be worth it, as you may find wealth that you didn’t realise you had. If this is the case, you may be able to retire sooner than you had originally anticipated.
3. Make sure you’re claiming all your tax relief
When saving for retirement, tax relief can be a valuable way to grow your wealth. So, it’s important to ensure you’re receiving the full amount you’re entitled to.
To put it simply, tax relief is available on your pension contributions at the highest rate of income tax that you pay. This means that:
- A basic-rate taxpayer, you’ll receive 20% tax relief on your contributions
- A higher-rate taxpayer, you’ll receive 40% tax relief on your contributions
- An additional-rate taxpayer, you’ll receive 45% tax relief on your contributions.
However, it’s important to note that only the basic rate of tax relief is added automatically. This means that if you pay the higher or additional rate of tax, you will have to complete a self-assessment to claim your extra 20% or 25% relief.
Typically, you’ll receive this in the form of a tax rebate. It’s also important to be aware that you can claim back tax relief from the previous four tax years (6 April to 5 April).
4. Maximise your allowances
If you want to ensure that you have enough wealth to support an early retirement, you should make sure that you’re making the most of your allowances.
Here are two of the most important ones to think about.
The first is the Annual Allowance, which is the limit on how much you can contribute into your pension in a given tax year and still benefit from tax relief. In the 2021/22 tax year, this stands at £40,000, or 100% of your earnings, whichever is lower.
It’s also important to be aware that once you start to draw flexibly from your pension, the Money Purchase Annual Allowance is triggered. This means that your Annual Allowance will fall to just £4,000.
When it comes to growing your non-pension wealth, the other allowance you may want to bear in mind is your Individual Savings Account (ISA) allowance. An ISA is a tax-efficient savings vehicle, as any interest or returns are paid free from Income Tax and Capital Gains Tax.
Because of this valuable benefit, there is a limit to how much you can save into an ISA in any given tax year. In the 2021/22 tax year, this stands at £20,000 but does not roll over, so if you don’t use it all, you lose it.
Making the most of these allowances can help you to grow your wealth effectively to support your desired lifestyle throughout your retirement.
5. Speak to a financial adviser
When it comes to building your wealth in preparation for retirement, there are several tax pitfalls that you could run into. If you want to avoid this prospect, you could benefit from seeking professional advice.
When you work with a financial planner, they can help you to grow your pension wealth in the most effective way, maximising your allowances and avoiding any potential tax issues.
They can also enable you to make properly informed decisions, giving you greater confidence that you’ll be able to achieve your retirement goals.
Get in touch
If you’re considering retiring early and want to know if you have enough, we can help. Email enquiries@bowmorefp.com or call us on 01275 462 469.
Please note:
Bowmore Financial Planning Ltd is authorised and regulated by the FCA.
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. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
Bowmore Financial Planning Ltd is not regulated to provide tax advice.
