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.