How can I manage the financial impact of early retirement?

Growing numbers of workers are being forced into early retirement as the full economic impact of coronavirus hits home, with many desperately worried about how they’ll make ends meet.

Over 270,000 workers aged over 50 have dropped out of the workforce since the pandemic began, according to Rest Less analysis.

If the current situation has left you with no other option but to retire, here are some steps which might help the financial impact of stopping work feel slightly less daunting.

How much will I need for my retirement?

When working out if you can afford to retire early, your starting point should be to think about whether your savings and/ or pensions will be enough to cover all your outgoings. As well as all your essential living costs, such as food, clothing, your mortgage or rent, Council Tax and utility bills and any regular debt repayments you make, for example, credit card bills or personal loans.

It’s a good idea to write a list of exactly how much you need to cover your monthly costs, and then to tot up how much you have in savings and pensions. You’ll also need to think about how long you’re likely to be retired. If for example, you’re stopping work at 55, you may have three decades or more in retirement.

It’s also important to factor how much you’re likely to receive from the State Pension once you reach State Pension retirement age. You can find out more about how the State Pension works here.

Pension advisors Profile Pensions have a useful Pension Calculator which can help you pinpoint how much you’ll need to live the retirement you want, so you can compare this with the amount you already have saved.

How can I track down any lost pension pots?

When looking at your pensions, it’s worth checking whether you have any retirement savings you might have lost track of or forgotten about. If you’re trying to track down an old workplace pension, start by contacting your former employer. They should be able to provide you with contact details for the pension provider.

If you can’t find the contact details for your previous employer, the government’s Pension Tracing Service may also be able to help.  You’ll need the name of an employer or pension provider to use the service, and the service should be able to help you find the contact details for your old pension scheme. The service won’t, however, tell you whether you have a pension, or what its current value is.

Find out more about finding missing pensions in our article on Tracing lost pensions.

When can I access my pensions?

The earliest you can get your State Pension is when you reach State Pension age, which is based on your date of birth. You can check your State Pension age here.

If you have a defined contribution or money purchase pension, under pension freedom rules introduced in 2015, you can usually access this money once you reach the age of 55. There’s a 10-year gap between pension freedom age and the State Pension age, so the age at which you can access your retirement savings is due to rise to 57 when the State Pension age reaches 67 in 2028.

If you’re 55 or older, accessing your pension might seem like the best way to fund early retirement, but there are several things to consider before you do this. Firstly, it means you will miss out on any future investment gains from the money you take out of your pension. You will also have less money saved away for the future and without an income coming in, this will become very hard to replace in the future. You will also need to consider the tax implications of taking money out of your pension. For example, normally, you can take 25% tax-free from your pension, with the remaining 75% subject to your marginal rate of income tax. This means if you take a large amount out of your pension in one go, you could end up moving into a higher tax bracket, potentially landing you with an unexpected tax bill.

Find out more about the pros and cons of accessing your pension savings here.

Can I improve my pensions?

If you can’t access your pensions yet, or have other savings available which mean you don’t need to dip into your retirement savings now, it’s worth checking that your money is working as hard as it possibly can for you. 

If you have a defined contribution pension, your pension contributions will usually be paid into what’s known as a ‘default fund’ unless you’ve let your provider know you’d rather your money was invested elsewhere. Default funds are generally ‘multi-asset ‘funds, which mean they invest in lots of different assets, such as shares, property, bonds and cash. It may be that there are alternative funds which are more suitable for your circumstances.

According to analysis by Profile Pensions, if your pension savings were to grow by an extra 1% a year, this could give you an additional £22,649 over 20 years, possibly enough to retire a couple of years early. This assumes a pension value of £50,000 growing at 5% vs 6% respectively with charges of 1% applied. Learn more about pension investments in our article Where is my pension invested?

If you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.

Am I eligible for any State support?

Retiring early often means having to get by on a reduced income, and you may be eligible for government benefits if you’re struggling to make ends meet. Universal Credit is the government’s overarching scheme to help cover living costs if you’re on a low income. You should be eligible to claim it if you’re under state pension age and you’re on a low income or out of work and you have £16,000 or less in savings. If you have more than £6,000 in savings (but less than £16,000) you will still be eligible, but it will reduce the amount you can claim.

Based on the most recent data from the Office of National Statistics, Rest Less has found that Universal Credit claims made by the over 50s have more than doubled to 617,000  since the beginning of 2020.

Find out more about how Universal Credit works and how to submit a claim in our article Everything you need to know about Universal Credit.

If you need any help or advice on claiming benefits, or you’d like to see whether you might be eligible for any other support check out our Where you can get help and advice about benefits.

Remember that money held in workplace or personal pensions could affect your entitlement to benefits, whether or not you take it out. Find out more about how any pension money could affect your benefits here.

Are there any other ways I can raise emergency cash?

If you’re not eligible for benefits it might help to think about any other ways you might be able to boost your savings so that you can cover your living costs.

Options could include equity release, which involves unlocking some of your property wealth, selling investments, or taking a payment holiday from debt repayments. These options should not be entered into lightly however, as there are drawbacks to consider. Our article How to raise emergency cash looks at some of the ways you might be able to raise a lump sum to support you through early retirement and outlines the advantages and disadvantages of each option.

Have you recently been forced to retire early, or do you think early retirement could be on the cards and you’re worried about covering your living costs? If so, we’d be interested in hearing from you. You can get in touch with us at [email protected] or leave a comment below.

Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.

9 thoughts on “How can I manage the financial impact of early retirement?

  1. Avatar
    Liz Clarke on Reply

    I am 54 have taken voluntary redundancy. I felt it was the only option as I was on the list for compulsory redundancies. I thought by doing
    this it was just speeding up the fact I was losing job but gain a little extra money.

    I am a single parent. I owe money and pay a monthly sum to Stepchange. I rent my house currently but know realistically I cannot afford this. I am hoping to move into my moms but as she is elderley it is not guaranteed how long this will be for. I am worried sick as I have tried for jobs but with so many people applying or having more experience it is making it very difficult. With everything done on line I am finding the process extremely stressful. This has had an impact on my wellbeing/mental state. I constantly worry about money and how I will afford to live.

    1. Avatar
      Helen on Reply

      Hi Liz. I’m sorry to hear you’re having a stressful and unsettling time.

      In your situation, understanding that you have options may be helpful and ease some of the panic you are feeling about the future. The Citizen’s Advice Bureau have a very useful page on your possible access to benefits and assistance with your job search via the JobCentre. You can read that here.

      On the Rest Less job pages, we provide lots of free resources to help with job hunting, CV writing, interview techniques and much more. We also have a huge range of courses, many of which are either free or at a significantly reduced cost for our Rest Less members.

      It sounds as though much of your stress is being taken up by future thoughts. If 2020 has taught us anything, it is that we have no idea what is around the corner (and that goes for good surprises as well as those less so). Might I also suggest something from our health and lifestyle section, in particular the articles on healthy mind, which includes mindfulness, CBT and ways to reduce anxiety and stress.

      Wishing you well.

  2. Avatar
    David Wood on Reply

    No mention of a reduced state pension due to reduced national insurance contributions unless you make voluntary payments. Any chance you can cover this?

    1. Avatar
      Helen on Reply

      Hi David

      Thank you for your really useful feedback – you’ve raised a really good point and we will look to add to this article in future.

      In the meantime, if you’d like more information on the State Pension, we have this article, How the State Pension Works which looks at it in more detail.

  3. Avatar
    Jane Manning on Reply

    Good Morning,
    I have been self employed for the majority of my working life. I am 59 years of age, an accounts assistant /book keeper and have had very little income since April. This is due to the businesses I subcontracted to have also been hit by coronavirus. I was struggling with technology anyway but starting to get to grips with the sage accounts package.
    At the moment I am about to claim the second self employment grant and also trying to plan my future pension circumstances.
    I am really enjoying your website and greatly appreciate all its contents.
    Many thanks

  4. Avatar
    Cicely24 on Reply

    You could mention that people can access the Jobseeker’s Allowance Of £72/wk for 6 mths (based on ni contributions not savings) and get state pension credits. However every £1 over a weekly income of £50 pension per week Will be deducted from JSA upto max of £123 When get no JSA

  5. Avatar
    Mr D Robertson on Reply

    At 61 I made the decision to make a change and work for a charity which might benefit from my experience. This did not live up to expectations and I chose to leave in March. Since then I have applied for several jobs but because there has been little to spend money on through lockdown I have gotten by with a small teachers pension from 20 years back and my private pension. These together plus money from the sad loss of my mother in January have meant that I have started doing things that I enjoy doing and offering more time to charities and environmental activism. Having re-evaluated my life I now feel quite content not to pursue further job offers and instead find useful ways to share my life experience. I would say if you are prepared to forgo some of the luxuries you were used to, you can forge a really fulfilling life.

  6. Avatar
    Dawn on Reply

    I am currently out of work and now at nearly 60 years of age am wondering whether to take early retirement as unable to find work. I am currently on single person’s UC. I have 3 pensions from previous employers and considering drawing from them monthly. They are worth around £200k in total. How can I work out if I could financially survive if I were to do this? Thanks.

  7. Avatar
    Paul L on Reply

    I took early retirement at 62 a year ago. I spent some time going through this process beforehand and I’m glad to say there have been no nasty surprises along the way. It was a good move for me as I have savings and a small company pension so will qualify for full state pension having paid 48 years of contributions.

    I’m enjoying my retirement but I would encourage anyone to start planning this event as early as possible and not leave it to luck.

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