Thinking about early retirement?

What’s early retirement?

Early retirement means stopping work when you’re younger than the State Pension age.

The state pension age for people in their 40s to mid-60s is currently between the ages 66 and 68. You can check your State Pension age, but as it is reviewed regularly, it’s possible it will change in future. 

What is the retirement age in the UK?

Legally, you can retire at any age, but you’ll need to consider how you’ll support yourself if you stopped working.

The normal minimum pension age (NPMA) is currently set at 55, increasing to 57 in April 2028. This is the lowest age most people will be able to access their pension.

State Pension and early retirement

The state pension depends on your personal circumstances, but it can also change. This could impact your future, so we recommend checking your State Pension age before making any decisions.

In fact, retiring early could impact how much state pension you’re entitled to. The new state pension is based on your National Insurance records and how many ‘qualifying years’ you have built up. Taking early retirement could impact this.

The State Pension forecast tells you how much State Pension entitlement you’ve built up so far. It also tells you what you’re on track to get and when you’re able to claim your State Pension.

Workplace or personal pensions and early retirement

The minimum age you can access your workplace or personal pension will be set by your pension provider. Some providers may allow you to start taking your pension at 55, while others may have a higher age requirement. Your policy documents will outline the relevant information and it’s worth reading these to help with your retirement planning.

Early retirement might impact your pension

Investing in a pension gives your savings the chance to keep pace with inflation, hopefully with extra growth on top. Retiring earlier than you’d originally planned means that it might not have the same amount of time to grow.

You should also consider that retiring early could mean your pension savings need to last longer than you’d originally thought. Additionally, withdrawing money from your pension early might leave you with insufficient funds later on. Will you have enough to maintain the kind of lifestyle you want in retirement?

Workplace and personal pensions

Defined contribution pensions

A defined contribution pension is a workplace pension that both you and your employer pay into for your retirement.

By taking early retirement, these contributions are likely to stop. This could impact any projections you’ve already received, especially if you’d originally planned to retire at a later date.

Defined benefit pensions

Defined benefit pensions are sometimes known as final salary pensions. This is because they usually guarantee a certain income in retirement. This income is based on how long you’ve been a member of the scheme and your salary when you retire.

Retiring early might reduce the amount of money you’re entitled to. This is because you’ll have paid less money in and because the scheme may need to pay you for longer.

Personal pensions

A personal pension is a defined contribution that you set up with a pension provider. You might choose to have a personal pension if you’re self-employed or don’t qualify for your workplace pension. It might also be a way for you to continue contributing to a pension if you take time off work.

A personal pension follows the same rules as a defined contribution pension. This means that from age 55 (age 57 from April 2028) you can begin to access your pension savings.

If you retire early, you’ll probably stop contributing to your pension and your savings have less chance to grow.

Early retirement due to ill-health

If you're in ill-health, you might be able to start withdrawing money from your pension early. This is sometimes called a medical retirement or retirement on medical grounds. The normal minimum pension age doesn’t apply in these cases.

Your policy document should outline the conditions covered. It’s always worth checking with your pension provider for more information if you think you’re eligible.

For more information on this, see our article about ill-health retirement.

Can you afford early retirement?

Retiring early isn’t suitable for everyone. Alongside the social impact of leaving work, the financial impact needs careful consideration. Of course, retiring early allows you to consider a complete change. Perhaps this means swapping a hectic career for a less stressful part-time job where your pension could supplement lower pay. You might also have other income, such as investments or releasing equity built up in your home by downsizing.

Working out what’s affordable is tricky, especially if you have multiple pensions, investments, or equity tied up in property. And things can get even more complicated if you want to reduce your working hours before retiring completely.

Tools like our retirement planner can help you calculate how much you might have if you retire early. It considers alternative income sources, multiple pensions and certain assets to calculate how much you might be able to withdraw. And you can also work out the difference that waiting a few years could make.

Pros and cons of early retirement

Pros

• You’ll benefit from free time to explore hobbies or visit friends and family
• Extra time to travel and explore new places while you’re still relatively young
• Take the time to learn something new
• Do something completely different like volunteering or working part-time somewhere new
• Start a new business and use your pension to supplement your income as it gets off the ground.

Cons

• Depending on the age you choose to retire you may not have access to your pension right away
• The social aspect of work shouldn’t be underestimated, especially if none of your friends have retired yet
• Boredom - retiring early might give you many years with not much to do
• Your retirement income is likely to be lower than your salary
• Running out of money – unless you’ve planned how you’ll spend your money, there might not be enough to last
• There will be tax implications – speak to a financial adviser to make sure early retirement is right for you.

What next?

There are lots of tools and guides to help you in your decision-making process. But a financial adviser is best placed to make sure the decisions you make are the right ones for you. If you don't already have a financial adviser, there are several directories that you can use to search for one in your area and according to their specialisms. Advisers may charge for their services, though they should agree any fees with you upfront.

And if you’re thinking about early retirement, gather as much information as possible before using these tools or seeking advice. You’ll need information like how much is in your pension, how much debt you have, and the value of any investments or assets. Our retirement planner may be able to help.