Can you afford to retire before State Pension age?

When do you want to retire? Are you dreaming of giving up work before you start collecting your State Pension? With news that the State Pension age is rising and suggestions the government needs to raise it quicker, it’s a question more workers may be thinking about.

With 15^th September marking Pension Awareness Day, now is the perfect time to consider whether your pension contributions are aligned with your plans. The sooner you start planning retirement, the more likely you’ll be able to make dreams a reality.

Changes to the State Pension age

Recently, the State Pension age for men and women equalised at the age of 65. However, further rises are planned and the State Pension age remains under review. By 2028, the State Pension age will be 67 and it’s likely to rise beyond this. It’s important to understand when you’ll receive the State Pension and to keep track of how legislative change will have an impact. You can check your State Pension here.

Whilst there are already steps in place to increase the State Pension, you may have seen recent news suggesting that it needs to increase at a much faster pace.

According to think tank the Centre for Social Justice the State Pension age should reach 70 by 2028 and 75 by 2035. The organisation argues getting more people in their 50s and 60s to continue working could boost the economy by £182 billion. It also notes the cost of providing the State Pension, which accounted for 42% of all welfare spending last year, a bill that is rising. Over the last 30 years, the cost of the State Pension has increased by over £75 billion, reaching £92 billion.

If you’d hoped to retire sooner, the State Pension age increasing could derail plans. The Centre for Social Justice paper is simply a suggestion, but you may not want to work up to the point the State Pension age is currently set.

3 steps to calculating if you can retire before receiving the State Pension

So, how can you retire before State Pension age? It’s a goal that requires careful financial planning. Fortunately, if this is your target, Pension Freedoms mean than you’re likely to have more options that you would in the past. Most people are now able to access their pensions from the age of 55, well before they can expect to start receiving an income from the State Pension.

However, simply being able to access pensions earlier in life doesn’t mean you can afford to retire sooner. Your pension provisions are likely to need to provide an income for the rest of your life. Making withdrawals sooner could leave you in a financially vulnerable position in your latter years.

You’ll need to take three essential steps to begin understanding if it’s possible to retire on your current provisions before you’ll receive the State Pension and how to make up a potential shortfall.

1. Set out your goals

Calculating if you can afford to retire before the State Pension age means you first need to set out what you hope to achieve. There are two key questions here; when do you want to retire? What will your lifestyle and spending look like in retirement? Understanding how much income you’ll need annually and your life expectancy are crucial to assessing how your savings stack up.

2. Understand your current pension savings

With an idea of how much you’ll need to retire sooner, you’ll need to look at how much you already have in your pensions. Remember to assess all the pensions you hold and factor in likely investment returns between now and your intended retirement date. With these figures, you’ll be able to see the level of income your pension will provide if you retire at different points.

3. Assess how other assets may be used

Pensions are often the key to creating an income in retirement, but they’re not the only option. You may have other assets that can be used to fund retirement, such as savings, investments or property. How could these be used to supplement pensions? Knowing you have other assets to fall back on can give you the confidence needed to move ahead with plans. You also need to ask whether you’d be comfortable using other assets for retirement income. Perhaps you’d hoped to leave property as an inheritance or savings to pay for potential care costs.

Identifying a shortfall

As you assess your pension savings, you may find that you’re in a better position than you thought. However, you could also find a gap between your ambitions and savings. If this is the case, identifying the shortfall is the first step to creating a financial plan that combines your aspirations and financial situation. This is where financial planning can help you understand what steps may help.

• Could you work longer than initially planned and still retire before receiving the State Pension?
• Would a phased approach to retirement appeal to you?
• Could you reduce your monthly outgoings or cut back on big-ticket spending?

If you hope to retire before reaching State Pension age and would like to understand the impact this will have on your financial security, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.