On your journey towards financial independence, you’ll likely be asking yourself “When can I retire?”. For those considering an early retirement, it is important to have an understanding of “Retirement” options available and any aspects that may factor into your own retirement planning.
At what age can I retire?
It’s never too early to consider your retirement (or your children’s) and since 2011, in the UK there is no longer a default retirement age. For the most part you can continue to work in your job until you choose to. Conversely, you cannot be discriminated against for choosing to retire at an early age.
The decision to retire is entirely yours to make, but as we know this is also primarily a financial decision. For most people, it will be dictated, directly and indirectly by the age at which you can access your state and private pension pots.
State Pension Age
For men and women born from 6th April 1978 onwards the state pension age will being their 68th birthday. In the 2013 Autumn statement, an announcement from the Chancellor implied that the State Pension age should increase for future generations. However, the Government is not currently legislating for this change.
In addition to the age requirement, to access your State Pension, you need to have made at least 10 years’ worth of National Insurance contributions.
To get a full state pension amount, you need to have paid National Insurance for 35 years. If you retire early, you might not hit this threshold. You can check to see if you’ll qualify for the full State Pension and to find out how much you could get on the Gov.uk website. If you have gaps on your National Insurance record and have not reached the 35 timeframe, you can also pay Voluntary National Insurance contributions.
The UK’s state pension is guaranteed income for life to those who qualify for it. In tax year 2020/2021, the full amount of the state pension is £9,110.40, which is paid weekly. The state pension is treated as an income, independent to any other courses or income or workplace/personal pensions you may have.
There is concern amongst those within the personal finance communities that a future government may make State pensions means-tested and could rule out those who have amassed assets. For this reason, many do not assume the State pension is guaranteed and so do not factor this into their retirement financial plans. If this isn’t the case, it’s a bonus!
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Private Pension Age
So far you may be wondering if you’ll have to wait all the way until your late 60s to receive a pension income. The bad news is yes for your state pension. The good news however is that we can access our private pensions approximately 10 years earlier that the state pensions.
When it was first introduced, the Normal Minimum Pension Age was 55. Following an announcement in 2014, this is being moved to age 57 in April 2028. Currently for those born from 6th April 1973 onwards, this would mean your state pension age is 68, but your private pension age would be 57. However, I expect this to change in line with those who are slightly older (10 years difference).
Many of those in employment are paying into a workplace pension. Alternatively, you may have a Self Invested Personal Pension (SIPP). For the vast majority your pension will do the heavy lifting in your retirement planning.
“If you can’t afford to put money in your pension, you’ll not be able to afford to live on your pension in retirement.”
Always aim to put the full value available to you into your pension each year. In financial year 2022 to 2023 this is £40,000. Regardless of your income level, every £1 saved should multiply in value by the time you reach your pension age.
In the example below I show that £1 saved could be worth over £32 when you calculate investment return and time invested. The power of compound interest! – For more information on compound interest, visit our Compound Interest article.
It’s better to put money into your pension earlier in your career and letting time in the market build its value for you.
When you put money into your pension in the UK, you are granted tax relief. This has the added benefit of reducing your tax amount each year and can be used to your advantage to bring your tax bracket down if applicable to you.
Early retirement through financial independence
Most people plan to retire in their 50s or 60s. This is the default path for man who go into employment, put a little away in their pension and let time bring this up in value. For most people on this path, moving from employment to retirement also comes with the biggest pay reduction of their career!
If you’re reading this article, you’re not most people. We are the enlighten many, those that are aware of F.I.R.E. – Financial Independence Retire Early. By achieving a situation where work is optional due to our financial status, those on the path to FI, often choose to retire early.
I retired at 40. Ah but you’re writing this blog and that’s a job I hear you cry. What’s different is that I choose to work on this blog and run it as a business. If I don’t make a penny from it, that’s absolutely fine.
Being financially independent allows you to “retire” at any age. To achieve such a situation where work is optional at any age, we need to own income generating assets that meet or exceed our needs.
These multiple streams of income could include: Stocks & Shares Investments, Business Investments, Rental Properties, Selling Digital Products or Affiliate Marketing Channels. Some would consider only those wholly passive income streams as valid, but personally I’m happy with a tiny little bit of work if it gives me more freedom and flexibility….oh and money.
Once your assets are consistently exceeding your requirements, you have the choice to continue working or not.
While our pensions are not available to specific dates in our lives, there are other ways to invest our money such as ISA’s and general investing accounts. ISA’s are a unique investment/saving account in that they allow your investments to grow tax free. At present the total amount you can put into your ISA per tax year is £20,000. Any profits made within general investment accounts are taxable.
Even the most lovable jobs will contain moments of loathing. But if you can suffer on with employment, there’s absolutely nothing to stop you continuing to work into your 70s or 80s.
There is a trend of people who are choosing to retire. Is this because they absolutely love what they are working at? Is it because they are financially unable to retire? It could of course be a combination of both.
Leaving employment and retiring, not just in early retirement is a huge life event. We spend nearly 40 hours a week working in our jobs. Sometimes much more. Our social circle at work is often closer than many of our family or marital relationships. After leaving employment you need to find yourself once more. And this is scary.
I always tell people I’m conditioned to work. It’s all I’ve ever known. It has taken me the longest time to let go of the belief that I need to be productive ALL THE TIME. I now work on those projects I know will have a meaningful change on others lives! (hence this blog).
What other factors affect when I can retire?
Ill-Health Retirement (Medical Retirement)
Unfortunately some of us will be forced from work due to a medical or ill-health retirement. This is when you leave work before the age of 55, due to disability or illness.
To get a medical or ill-health retirement, you must provide medical evidence that you cannot do any of the following:
- your job
- any other job for your employer
- your job or a similar one until you reach state retirement age
- have treatment that would allow you to do your job
You will have to provide this evidence to your private or workplace pension provider. It’s advisable to gain legal advice when applying for this type of retirement, as you will need to ensure that your evidence meets specific criteria.
In cases of serious ill health where your life expectancy is less than one year, you might be able to take all your pension as a tax-free lump sum.
The age at which you can claim your state pension is unaffected by a medical or ill health retirement
How much do I need to retire?
As we’ve noted above, the decision to retire is a financial one. I suggest that because of this, “When can I retire?” should be reworded as “how much do I need to retire?”.
In the post – https://foundered.co.uk/how-to-retire-early-in-your-40s/ I outline the steps you need to determine how much you need to retire early. It gives consideration to the “4% rule”, however many do opt for a 2.5%-3% withdrawal rate. A counter argument to the above, is that many do not factor in their state pension or the willingness to earn some income in retirement.
Retirement is entirely dependent on your personal factors and with planning, you can shape it as you wish. Be mindful of the key dates at which your retirement finances are released, but are these even relevant to the early retiree?
If you are financially independent, you can retire at any age.
Most people are financially reliant on their pensions for retirement and the details for receiving these are as follows:
Private / Workplace Pension – For those born after 6th April 1973, you can access your private or workplace pension at age 57.
State Pension – For men and women born from 6th April 1978 onwards the state pension age will being their 68th birthday.
There is no legal retirement age. Your employer can no longer dictate that you must retire at a specific age. This is now purely a personal decision.