On balance, for most people, working is a means to an end, a necessity, and a way to try and make the most of life and pay the bills. And yes, an opportunity to have a fulfilling life in, hopefully, a career or careers, we enjoy.
It’s fair to say that, in most cases (but not all), we look forward to retirement, and the sooner the better.
It’s an aspiration to finish our working lives as soon as we can and then have the time and money to appreciate the better things in life, such as travelling, taking up new hobbies or spoiling the family.
In days gone by many had only had the state pension to look forward to, which meant waiting for retirement at 65, and then living on a relatively low income.
Even for those with a company pension, there were specific ages at which you could begin taking your full pension – 60 not being unusual.
However, with the introduction of pension freedoms some years ago, there is now the realistic possibility of retirement at 55.
Well, how to prepare for what some might call early retirement?
Firstly, it goes without saying that the state pension is not what it once was, and the government is eager to ensure that as many people as possible have access to a pension.
In the last few years all employers have been required to provide a workplace pension scheme for their employees – called auto enrolment – both the employer and government contribute in these schemes.
Looking ahead, one broad rule of thumb should be to try and target around 70% of net pre-retirement income. Also factor in that inflation can significantly affect your buying power and capital over time.
Although it has been low in recent years, with the financial stimulus we’ve seen from government to deal with crises such as Covid, a very different inflationary environment could arise.
As always, possibly the most important aspect of pension planning is to start early. In general, the earlier you start, the less you’ll need to put into a pension scheme to obtain the income you’d like.
Paying around 10% in your early 20s may well get you a decent level of retirement income, but wait until your 40s and the contributions needed to obtain the same income could be double.
Maximise your employer pension contributions, and take advantage of the maximum tax relief on offer. Also, if you fall into the higher rate tax bracket, make sure you claim higher or additional tax rate relief by contacting HMRC or completing tax return. Remember, this additional relief is not automatic.
Where possible, ensure your pension is invested in the most suitable range of funds for you, and keep it updated.
If you’ve worked for more than one organisation, there’s a very good chance you’ll have a pension pot with each. Don’t forget these – literally thousands of pounds could be waiting for you.
Furthermore, they might seem a bit mundane and not very exciting, but get the most out of other sources of retirement income, including ISAs. And if you have another source of income – for example you may be fortunate enough to have a second property you’re renting out – consider how you can use that income most effectively.
Ultimately, retiring early doesn’t have to be the unachievable dream it maybe once was, and it’s not uncommon for individuals in their late 40s or early 50s with a defined benefit pension scheme to find themselves with a pot of hundreds of thousands of pounds. These “pots” can now be transferred out of a company pension scheme providing the access and flexibility to use this from 55.
Whether you are stating out in work life, or nearing the end of it, there are plenty of options to help prepare for retirement.
However, whatever stage you are at in life, there is no substitute for getting independent financial advice, and doing so regularly.
So what are you waiting for – take the first step and make that early retirement dream a reality.
Keith Brooks is the chartered financial planner of Aberdein Considine