If you’ve left the working world early, whether by choice or necessity, it can be a challenge suddenly having to manage your finances on a reduced income.
This is borne out by recent analysis which shows that those who left the workforce during the peak years of the pandemic have been faced with unprecedented economic hardship.
According to research from the Institute for Fiscal Studies (IFS), 48% of adults aged 50 to 70 who left the workforce in 2020-21 have ended up in “relative poverty”. Those surveyed were spending around £60 less on food each week, and reported lower levels of well-being than in previous years. Most worryingly, the same group also had less to lean on in the way of pension entitlement. About half (49%) said they did not have access to either private or State pensions – though in many cases this may be simply because they were too young to start claiming them at the time.
This data may not come as a huge surprise to some. The pandemic was marked by widespread redundancies and long-term health issues, both of which forced a huge number of people out of the workforce, whether they wanted to leave or not.
There are positive signs to look to as well. Interestingly, older workers who stopped working in the following year (2021-22) reported “similar living standards and well-being” to their pre-pandemic counterparts, indicating a return to the norm. While this hopefully suggests that the data from the 2020-21 cohort was an anomaly rather than the beginning of a long-term trend, the heightened cost of living means that anyone entering retirement should keep a close eye on their finances and make sure they are budgeting appropriately.
It’s also worth keeping in mind that we’re seeing more and more people choosing – or needing – to keep working past retirement age in order to keep themselves afloat. Our own Rest Less analysis of Office for National Statistics data found that nearly one in two women aged 50-65 say they plan to continue working after they reach State Pension age and there has been an enormous increase in men working in their 70s in the past decade. It could very well be the case that the positive movement in the IFS’ data is because most of those retiring now can afford to do so.
Peter Matejic, Chief Analyst at the Joseph Rowntree Foundation, said: “This research shows many older workers were swept out of work by the coronavirus pandemic rather than this being a positive choice.
“Supporting people back into employment should be a priority for the government alongside ensuring that those who aren’t working can afford the essentials. The government needs to make sure Universal Credit payments when you are out of work never fall below the amount food, utilities and other essentials cost.”
You can find out more about Universal Credit and whether you’re eligible to claim it in our guide Everything you need to know about Universal Credit.
Tips for managing your finances after early retirement
If you have retired early and want some tips on getting yourself sorted financially, our guide How can I manage the financial impact of early retirement? might prove useful. However, here are a few tips to get you started.
Work out your spending
Unless you’ve managed to build up significant pension savings, it’s usually the case that your income will fall, often substantially, when you retire, which means that it can be a really good idea to review your spending and work out a weekly or monthly budget.
A good way to start can be to make a list of your current outgoings so you can see exactly how much you are spending. So, for example, this list should include all your necessary expenses such as:
- Food and clothing
- Household bills
- Rent or mortgage payments
- Any other debts you are repaying
- Council tax
- Insurance premiums
Think as well about any other regular payments and purchases you make. For example:
- Subscriptions (eg. gym, Netflix, Spotify)
- Leisure and entertainment
- Travel and holidays
- Gifts for family members
Some of these might be harder to put an exact number on, but they’re still useful to have in mind if you spend money on them regularly.
From there, if you work out roughly how much you spend in an average week or month then you can start working out how much you’ll need, what you may need to cut down on, and if you might need to look at ways you can bolster your income. The Pension and Lifetime Savings Association has calculated that the average person currently needs an income of £12,800 a year to retire at a “minimum” standard of living, but you may find that you need more or less than this to get by.
Consider accessing your private pension
If you have left the workforce before the State Pension age, then you won’t be able to access your State Pension until you turn 66.
However, you may be able to access your private pension earlier than this.
If you have a defined contribution or money purchase pension, you can usually access up to 25% of your private pension from age 55 tax-free (rising to 57 by 2028). However, if you’re planning on dipping into your pension in your fifties, you should make sure you think carefully about the longer term consequences of doing so. Not only will it reduce the amount of savings you will have later on, but you will also miss out on any potential returns that this amount might have accumulated as well. Learn more in our article Should I take a tax-free lump sum from my pension?
You can find out more about the pros and cons of accessing your pension savings in our article Should I use my pension to boost my income? and the different ways you can use your retirement savings to provide you with an income in our guide Your pension options at retirement.
Our Rest Less pension calculator can provide you with a forecast of the pension income you might be able to get when you retire. This can include your State Pension entitlement if you want it to, and you can also see the impact of taking 25% of your pension as tax-free cash. You can amend your retirement age and the level of income you want as well, to see how these affect the length of time your pension will last.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Could you top up your State Pension?
The amount of State Pension you will be entitled to when you retire is calculated by the number of National Insurance Contributions you have accumulated, either through years in employment or caring for a child, with 35 being the maximum number.
If you think you are missing some qualifying years, then you can buy some to top up your record. You can buy up to 10 years’ contributions, and the current rate is £17.45 per missing week, so it’ll set you back £907.40 for a full year. This will boost your pension by just over £5 a week, or around £302 a year.
While this can be a painful upfront expense, it can set you in good stead for when you reach the State Pension age. The longer you spend in retirement, the more you will benefit from having an increased State Pension each year.
Be aware that there is a time limit for paying back qualifying years. You can usually only make up gaps from within the previous six years, and you may need to pay a higher rate for gaps from over two years ago. Find out more about whether topping up your State Pension is right for you in our guide Is it worth paying to top up your State Pension?
Check your benefit entitlement
If you are struggling to make ends meet after leaving work early, you may be eligible for government support.
Universal Credit is the overarching benefit scheme for people under State Pension age on low incomes, so this is a good place to start. Find out more about how it 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 lump sum payments and savings can affect your benefits.
Should I go back to work?
It’s not a pleasant prospect to face going back to work if you consider yourself retired, but you may consider it a necessity if you feel your current income is not enough to support yourself.
If you think you would benefit from seeking full or part-time work to supplement your income, our job search tool allows you to look through a variety of vacancies from age-diverse employers, filtering for role, location, full-time or part-time, and remote or in-person.
If you’re reluctant to return to work, there may be other ways to boost your income. For example, you could consider renting out a spare room in your home if you have one, as you can earn up to £7,500 a year tax-free under the government’s rent a room scheme. Read more in our article Renting out a room – what you need to know.
You can also rent out free space as storage, or a parking space, or you may also have unused or unwanted items in your home that you can sell. You can find plenty more ways to make extra income in our article 24 ways to make extra money and boost your income.
Do I need to retire early because of my health condition?
If you are still in work but are considering retirement due to a health condition, read our article Can I retire early because of illness or disability? to find out more about your current options. Your employer has to make reasonable adjustments to accommodate your illness or disability, so if you want to continue working, speak to them first to try and figure out a solution.
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