Not everyone has the luxury of choosing when to retire, as health, family, layoffs, and other factors can force you to do so.
In recent years, the fallout from Covid and the cost-of-living crisis has kept some people working longer, while others have started tapping into retirement ahead of schedule.
Assuming you can decide for yourself, how much you have saved and your likely income will be the most important or one of the most important considerations.
When will you retire: The minimum age for accessing a private pension will increase from 55 to 57 in 2028 and the state pension age will increase from 66 to 67 between 2026 and 2028
Financial giant Standard Life says understanding how much you need for your desired lifestyle in old age is essential, and it’s calculated the impact on your savings of retirement over different ages.
The financial considerations and some other things to consider are listed below.
Do you want to retire at 55, 60, 65 or 68…?
The savings you make late in your working life can have a disproportionate effect on the size of your retirement pot, according to Standard Life.
This is because a few extra years at work, when your contributions are likely to be higher and compound interest can have more leverage, can result in significantly more money for your retirement, the pension company explains.
It looked at the impact of retirement at different ages on someone who started working at age 22 on a salary of £23,000, saw annual salary growth of 3.5 per cent and investment growth of 5 per cent, and contributed the automatic enrollment minimum to a pension.
You could build a pot of £203,000 at 60, but this would add up to £263,000 at 65 and £304,000 at 68.
Standard Life assumed an annual inflation rate of 2% and costs of 1%. The minimum age to access a private pension will increase from 55 to 57 in 2028
“For those who are able to do so, paying a pension consistently from the earliest possible age can make a huge difference over time,” says Standard Life.
But it notes, “The back end of your working life is when compound interest can have the greatest impact.
“By building and growing a pension over time, compound interest also builds each year, so by the end of your career your pot is likely to be bigger.
“In addition, people who have worked for decades may earn more in terms of salary, which means that the pension premium can be higher and the impact of compound interest will also be much greater.”
What is the minimum pension contribution?
Who pays what: automatic breakdown of minimum pension contributions
Can you afford a decent pension?
To find out what you need to live on, it’s worth checking out Retirement Living Standards tool from the Pensions and Lifetime Savings Association, says Jenny Holt, director of savings and investments for clients at Standard Life.
It looks at what a single person and a couple need to afford a minimal, moderate and comfortable life in old age.
“In addition to day-to-day costs, the tool takes into account what is needed for extras — gifts, vacations, and major purchases — as well as one-time expenses that arise throughout life,” says Holt.
Jenny Holt: While the freedom of retirement is exciting, loneliness and boredom can be a problem for retirees
Is it worth taking early retirement at all costs?
Some people follow the disciplined “Fire” program — “Financial Independence, Early Retirement” — to retire much earlier than others, Holt explains.
“They take a number of different routes to get there, but some lead extremely frugal lifestyles for just a few years of work, spend up to 70 percent of their income on savings, and then retire in their 30s or 40s.
“In reality, this is incredibly hard to do, especially in the current inflationary environment, but this shows the tradeoffs involved when it comes to retirement savings and the importance of having a goal.”
We’ve looked at the FIRE movement and the pros and cons of this no-holds-barred approach to saving for retirement here.
Trying to decide when to retire? Here’s what to consider
Jenny Holt of Standard Life and Andrew Tully, Canada Life Technical Director, share tips to help you make a decision.
1. How much have you saved?
“Before you retire, make sure your income supports the lifestyle you want,” says Tully. ‘That could be from the AOW, private pensions or other savings such as ISAs or real estate.
“Calculating how long you could live and how sustainable your desired income level is is a complex task, so consider seeking professional advice.”
Holt says, “Before you make the big decision, it’s important to know how much income your retirement savings will bring you and to understand what your standard of living will be.
“A retirement calculator and the PLSA’s Retirement Living Standards tool (see above) are great places to start.”
Do you plan to live off your investments after retirement? Read our guide. Annuity rates have recovered recently. Find out more.
2. What about the state pension?
The full state pension for those who have retired from 2016 is currently £9,600 a year and will be increased to £10,600 a year from April next year.
Andrew Tully: Consider retiring if you have financial obligations to your family or significant outstanding debt
The official state pension age for men and women is 66, but will increase to 67 between 2026 and 2028.
“If you plan to retire before this age, make sure you have enough income from personal and occupational pensions or other savings and investments to close the gap,” says Holt.
3. Are you on top of all your old pots?
Now everyone is automatically enrolled in a new pension every time they change jobs, we all build up more and more pots, and many of us lose touch with them as time goes on.
According to an industry estimate, savers have lost 2.8 million pots worth a total of £26.6 billion.
The government has a free pension tracking service here, and read our guide to tracking down your old pots here.
4. Have you thought about taxes?
There are pitfalls to be aware of leading up to, in and after retirement. We explain here how you can defend your pension against the tax authorities.
5. What is your personal and family situation?
“Many people approaching retirement belong to the “squeezed out” generation, who care for elderly parents as they try to help children through college or up the housing ladder,” says Tully.
“Consider retiring if you have financial obligations or large outstanding debts.”
He adds that you may want to coordinate your retirement with your partner.
Holt says, “As you approach retirement, you may have a number of caring responsibilities, including elderly parents and grandchildren.
“This could influence the decision to retire as family time is precious, but if in doubt check what kind of care leave your employer offers – some can be very generous.”
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6. Are you ready to retire?
“Work can have a negative impact on health, or you just don’t enjoy it anymore,” says Tully.
“That could be an opportunity to retire more easily by moving to a part-time job that is less stressful or more enjoyable.”
7. What will you do after retirement?
Holt says: Think about how you spend your time now and will do in the future.
“While the freedom of retirement is exciting, loneliness and boredom can be a problem in retirement, so think about your social circle and whether you have a good set-up for the huge adjustment.”
Tully says, “Make sure you’re emotionally prepared for retirement and have a plan. People need something productive to fill their time with.’
8. Are your plans solid?
“Retiring is a big step and no one wants to be financially forced to go back to work later,” says Tully.
“So it’s important not to rush things and to take the time to plan carefully so that you make the right decision about when to retire.”
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