There’s no denying it, the prospect of retiring at 55 is more than appealing, but leaving the working world early is no easy task and typically requires a lot of planning ahead. Here are some tips to help you take control of your retirement and wave goodbye to your working life a bit sooner.
How much could you need to retire at 55?
If you want to retire early, it’s important to have an idea of how much you’ll need in your retirement pot to maintain the lifestyle you want. How do you find this out, you ask? Well, how much you’ll need in your pension pot will likely depend on how much you’re aiming to get in annual retirement income and how long your retirement life could last. According to a recent study, you’ll need at least £10,200 a year to be able to cover your basic needs in retirement1. So, let’s say you want to enjoy retirement without worrying about money, and you’re assuming that you’ll live until the age of 80 – 25 years from your 55th birthday. Then, you’ll need about £255,000 in your pension pot by the age of 55. This number can look scary, but there are many ways to help you get there.
Start planning for retirement early
A good way to take control of your retirement is to start planning sooner rather than later. If you’re in your 20s, you might think it’s a bit too early to think about your golden years, but preparing for retirement at a young age could help you live the retired life of your dreams. If you can’t save for your retirement in your 20s, it’s fine, there are other things you can do, which will help you build up a decent pension pot. Getting your finances in order could be a great place to start. Consider limiting your spending and developing healthy money habits. It could be worth creating an emergency fund in case unexpected expenses come your way. Once you’re comfortable financially, have a look at the different retirement options you’ve got. If you’re entitled to claim a state pension, just make sure you’ve been paying your national insurance contributions. To receive the full state pension, you need to make contributions for 35 years, and if you’re eligible, you could receive £168.60 a week2 from the government. If you’re employed, it could be a good idea to also pay into your workplace pension. Since April 2019, you must contribute at least 5% of your pay, and your employer will top up by paying a minimum of 3% of the amount you’re getting paid. If you can afford it, you could also choose to increase your contributions to give your pension pot a little boost.
Consider investing in a personal pension, or a SIPP (Self-Invested Personal Pension)
As you grow older, you may need to find other options to maximise your retirement pot and future income. Assuming your finances are in good shape, investing in a personal pension (also known as SIPP) could help you reach your retirement goals. So how does it work? A SIPP lets you build up wealth in a tax-friendly way. Your money will typically be invested in a wide range of investments, such as bonds, shares, and property, and you’ll receive a 25% top up. This means that for every £100 investment, you’ll only need to pay in £80 and the government will add the remaining £20 to boost your pot. For higher and additional rate taxpayers, the top up increases - however, you may need to contact HMRC to claim the extra tax relief.
If you opt for a SIPP, it’s important to understand the different rules attached to it. To start with, the amount you can invest tax-efficiently is limited. Currently, the total amount you can get tax relief on is £40,000 , or 100% of your earnings per year (whichever is lower) – this allowance is the combined contributions made by you and the government. If you can’t use your whole SIPP allowance, that’s fine, you can carry it forward over the next three years, provided you have earnings that are at least equal to the total amount of your contributions and you’re a member of a registered pension scheme.
Another key SIPP rule is that you cannot access your money until you turn 55 - that way your pot has time to potentially grow. However, you’re still allowed to pay into your personal pension until you’re 75, and even better, at the age of 55, you’ll be able to take up to 25% of your pension money as a tax-free lump sum.
Consider consolidating your pensions
If you’ve had many jobs and contributed to different workplace pensions, it could be a good idea to locate where they are so you can consolidate them into one simple scheme. But before putting all your pensions in one place, it’s important to do your research and compare the different providers. When shopping around, make sure you check the charges and fees, as they can make a significant difference to how much money you will have in retirement. But don’t just focus on fees. It’s also worth looking at the entire package offered by investment services. So, make sure you consider things like customer service, user experience, and of course investment strategy.
Whether you want to open a personal pension or consolidate your previous pensions into one, robo-investing platforms, like Wealthify can help. With our platform, you can save for retirement with just a few taps. All you need to do is choose the amount you’d like to invest and the risk level that suits you. We’ll do the hard work for you, from building your Wealthify Pension to managing it on a regular basis. Also, every time you make contributions to your Plan, we’ll automatically add the government’s top up to your pot and invest it for you.
If you have any questions about our Wealthify Pension, don’t hesitate to get in touch with us.
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.