Should I retire early?

Is retiring early a good idea?

Early retirement is the goal for many people. But anyone considering retiring at a younger age needs to understand the impact it will have on their pension and lifestyle.  

Retiring even five years before the state pension kicks in, which is currently at age 66, but set to increase, can have a dramatic effect on how long your pension pot lasts.

Here’s what retiring early may mean for your pension pot, and lifestyle:

What will early retirement look like?

The Pensions and Lifetime Savings Association estimates that an average UK retiree will need at least £13,400 per year in retirement for a minimum lifestyle, rising to £31,700 per year for a moderate lifestyle as a single person. While the state pension can help retirees reach that income level, those entering retirement early will feel a much larger strain on their pension pot until the state pension kicks in.  

For many, the appeal of retiring earlier is that you’re younger and can enjoy doing more. You might have plans to travel, socialise or do other hobbies. But these come with a price tag. That’s not to say it’s impossible to take your pension early – it’s just important to plan ahead and either fund your pension accordingly or change your future income plans.

Early retirement is a luxury for most. But whatever your circumstances, you should consider all your options to make the most of your retirement. If you're unsure about your options, speak to a financial adviser.

Check out our retirement checklist

How much do I lose if I retire early?

Retiring too early means you’ll either need to find money to fund the rest of your retirement or significantly change the amount you take from your pension each year.

For example, someone retiring at the age of 55 with a £200,000 pension pot can take a £15,000 income but it will only last until the age of 72. That £15,000 also doesn't increase with inflation, meaning its spending power will decrease over time.

However, retiring five years later would mean that pot lasted until age 83* (even without adding to it during that five-year period). Retiring at 65 would mean even more investment growth, with their pot lasting until they turn 100 – far beyond the average life expectancy of someone that age.

Regardless of the age you retire, it’s important to realise that a £15,000 withdrawal will not mean £15,000 in your pocket. Some of this could still be subject to income tax, although you will get your yearly tax-free Personal Allowance, as well as 25% of your pension tax-free. When your state pension kicks in, this will also be factored into calculating income tax, so it can be a key consideration when deciding if an early retirement is possible.

Learn more about accessing your pension and drawdown.

What if I take less income in retirement?

So, what if someone decided to retire at 55 but changed the amount of income they took from their pension? For it to last until they turned 90, they would have to take £7,650 less from their pension each year, compared to retiring at 65. Even retiring at 60 would mean withdrawing £4,600 less each year.

Retiring with a £200,000 pension pot

What is the value of an average pension pot in the UK?

The average pension pot in the UK is £91,000, according to The Investing and Saving Alliance (TISA). This means it would pay out an income of £8,000 a year if you took it at age 65 and wanted it to last until the age of 90*.

However, to retire 10 years earlier at age 55, you’d have to take over a 40% pension pay cut. Likewise, if you chose to take a £10,000 annual income from it, it would run out before state pension age, at 64. But if you retired at 65 instead, you could withdraw that £10,000 each year until the age of 82.

Retiring with a £91,000 pension pot

Can I claim benefits if I retire early?  

Accessing benefits when retiring early can be tricky. Your personal pension cannot be accessed until age 55, which will increase to 57 in April 2028. So, if you plan to retire before you can access your pension, you will have to save through another vehicle, like an ISA, and use this until you can withdraw from your pension.  

You will typically not be able to get aid from unemployment benefits during this time either, unless you are actively searching for work. However, if you have been laid off, or if you are retiring early due to illness, there may be some benefits available to you.

When should I retire?  

There’s no perfect formula for when to retire, because of the unknown factors of how long you’ll need that income, and how your money will grow if it’s left in the market. But keeping estimates safe can allow for a more relaxing experience, and ensure you have enough money left in your pot for care towards the end of life, if needed.

Once you reach state pension age, you’ll get a big boost to your income. Depending on how much you plan to spend in retirement, this could be a significant factor. To get an idea of how much you will spend each year in retirement, you can take a look at your current spending, and eliminate any costs that will go away (such as commuting to work), while anticipating new costs (like a few extra holidays or paying for hobbies, for example).

Can I retire early and still work?

Retirement can take different forms for different people. If you want to retire early, but don’t feel comfortable with the size of your pension pot, you can also consider working during retirement. This does not need to be to the same extent as during your career, but could involve part-time roles, consulting, or working in a local business.  

*Assumes 4% investment growth post charges each year. For illustrative purposes only, returns not guaranteed.