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Find out moreWritten by Retirement Line
Retiring early is a dream that many cherish, but as later life edges nearer they often find it to be financially unattainable. But with careful planning and the right approach to financing, taking early retirement can be more achievable.
In fact, when it comes to funding your retirement years ahead of schedule, you might find that you have several options to mull over.
By maximising your workplace pension contributions, exploring the benefits of personal pensions, and taking advantage of tax incentives, you can set yourself a goal to put enough money away during your career to fund an early retirement.
You should also consider how you intend to take your retirement income, as this can impact the level of income you ultimately achieve.
Here are some ways that you may be able to boost your pension income:
If you are employed, then take advantage of your workplace pension scheme. Your employer’s contributions to your pension savings can make a huge difference, and some will match what you put in.
If you already pay into a scheme, you may want to think about increasing your contributions in the run up to your retirement. Look at the option of contributing the maximum amount allowed. You may also be able to make one-off contributions to top up your fund, perhaps when you get a bonus, for example.
Tax relief can be a highly valuable benefit of paying into a pension scheme. If you’re a basic rate taxpayer, you will get 20% tax relief. This means every £100 that you pay into your fund becomes £125.
If you pay the higher rate of 40% in England, Wales or Northern Ireland then you can claim back an extra 20% tax relief on the income you pay higher rate tax on. This means that your tax relief totals 40% to match your 40% tax rate. You do this via your tax return at the end of each year
But you should also make sure you understand other potential tax implications of paying more into your pension. For example, the maximum amount you can contribute to your pension scheme/s in each tax year before you have to pay tax is £60,000. This is known as your personal allowance.
As always with important decisions about financial matters, consider taking professional advice to help decide what’s right for you
If you are self-employed, you may wish to explore joining a pension scheme if you haven’t already done so. Personal or private pensions are the closest thing you can get to a traditional employer pension. However, you’ll be the only one contributing into it.
Joining a personal pension scheme, stakeholder pension or self-invested personal pension means that you will benefit from tax relief in the same way as workplace pensions.
Or, if you are self-employed or the sole director of a company that doesn’t employ anyone else, then you could also consider a National Employment Savings Trust (NEST).
Read more about the various pension options for self-employed workers in our article: Under a quarter of self-employed on track for moderate retirement.
If you intend to retire early, it’s crucial to work out how much retirement income you’ll need and how you intend to access your fund. The more you know about your options and the income you may be able to achieve, the more likely it may be that you can retire earlier.
From the age of 55 (57 from 2028) you can turn your defined contribution pension fund into a retirement income in a number of ways. These include purchasing an annuity, arranging a drawdown scheme, taking lump sums, or doing a combination of these. Make sure you understand your options well before your planned retirement date.
For free guidance and information on your options for turning your defined contribution pension into income, speak to the government-backed service Pension Wise. They offer a free one-hour appointment to explain everything to you.
People are living longer lives than before and there is increasing talk of a 100-year life. You might find that saving into a pension alone may not be enough to retire early on – especially if your retirement could span four decades or more. To ensure you have enough to live on, other options such as property wealth could be worth considering.
You may benefit from professional financial advice to help you decide whether and how property could play a part in your retirement income plans. However, here are some ideas to consider:
Investing in rental properties can provide a steady stream of income during retirement. However, it's essential to thoroughly research the property market and consider factors such as location, your buy-to-let mortgage options if you’ll need one, and potential rental income vs costs, including the tax you typically pay on the income you receive.
Not everybody has the cash to put down for a buy-to-let property – but you might have a spare room in your home. If you have some extra space, consider renting it out through platforms like Airbnb. In addition, the government’s Rent a Room Scheme lets you earn up to £7,500 each year tax-free from letting out furnished accommodation in your home.
For homeowners aged 55 and over, equity release allows you to unlock some of the equity from your property without having to sell it. If you want to retire before reaching State Pension age, you could unlock what you need now to see you through. However, due to the way a plan works, equity release can be expensive and it will typically reduce the value of your estate, so you’ll need to seek specialist advice before making a decision.
If you live in a large house and don’t need all that extra space, then downsizing your property could unlock the extra funds you need to retire early. A smaller home can also mean lower maintenance costs and you may even pay off your mortgage in the process, saving you money in the future. Just remember that there are always costs in moving home, so factor these into your decision.
Putting some of your money away into Individual Savings Accounts (ISAs) and other savings or investment vehicles can boost your chances of retiring early with tax-efficient savings and opportunities for long-term growth.
ISAs offer tax-free savings and investment options to help your money grow over time. Importantly, any interest, dividends or capital gains earned within an ISA are not subject to income tax or capital gains tax. Having a Cash ISA can also ensure you have access to emergency money in your long retirement to avoid dipping into your pension savings too early.
Building a well-diversified investment portfolio can also help grow your wealth over the long term. If you aren’t confident in choosing how to invest your money, a financial adviser will help you decide how to invest and spread risk to maximise returns.
Perhaps you’ve always had dreams of working for yourself? After years of working your way up the career ladder, now could be the time to apply your experience and skillset to your own business.
If you have a passion or a marketable skill, starting your own business can provide an additional source of income to fund your retirement. Start by thinking of something profitable that you’re good at. What do you enjoy doing? What do people come to you for advice for?
If you're not ready to dive into full-time entrepreneurship, think of something you love that you can do in your spare time to supplement your income and accelerate your path to early retirement. Whether it's offering consulting services, tutoring, pet sitting or selling handmade crafts, there are numerous avenues to turn your skills into income.
One of the simplest ways to make your money stretch further is to adjust your lifestyle and manage your expectations for retirement. Adopting a more frugal lifestyle won’t just help you save more for your future – it could help you retire sooner.
See if you can cut unnecessary expenses, prioritise needs over wants, and create a detailed budget to stay on top of your income and expenses. Use your budget to guide your savings strategy and ensure that you're on track to achieve financial independence from your planned retirement age.
Achieving early retirement requires careful planning, disciplined saving and strategic investing, but it might be more achievable than you think.
By exploring various financing options such as pension planning, your property wealth and lifestyle adjustments, you can take meaningful steps now to make early retirement an achievable milestone.
Remember, if you aren’t confident with making decisions about these things then you might wish to consult a financial adviser. They can put a tailored plan in place to ensure you reach your early retirement goals.
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