For those on the cusp of retirement as the COVID crisis hit, it couldn’t have come at a worse time.
A combination of waning investment returns and an unstable jobs market meant that both their saving ability and capacity in the final months and years of their working lives – also known as their “peak earnings period” – was suddenly in jeopardy. For many, this was just the nudge they needed to consider early retirement.
Despite the experts advising soon-to-be retirees against taking the plunge during the pandemic, imploring this cohort to stay the course for at least another six months to two years in the interest of future financial stability, many decided that the time had come. Aside from fluctuating markets, reduced hours, job losses and a re-evaluation of the importance of quality time persuaded others to cut their professional lives short.
In the UK alone, a survey found that as many as 154,000 55 to 64-year-olds were pushed into early retirement for one reason or another as a result of COVID-19.
If these statistics tell us anything, it’s that there has never been a more pressing time to reassess plans for our financial future. For those considering taking early retirement in the not-so-distant future, we have compiled some helpful tips to make this significant transition easier.
Make practical calculations
Early retirement is a dream for many who have spent decades putting in the hard slog – but is it a feasible goal? It’s integral to make practical calculations – taking into account that your retirement may span four decades if kick-started early – to ensure that you can afford to take such a big step.
What’s more important is to factor in changes stemming from the global crisis that may affect your regular contributions. According to an OECD study, societal lockdowns have reduced the ability of both workers and employees to contribute to private retirement plans, while the liabilities of defined benefit schemes are likely to grow.
Carrying out a reassessment of your current pension structure and position is vital at this point to ensure you are still on track to retire early, and to make the necessary adjustments if it appears this plan may be at risk.
Avoid dipping into your retirement savings
If you are among those that have been affected by the pandemic, either through redundancy or a reduction in hours, you may have considered dipping into your retirement fund to ease the financial burden.
As tempting – or in some cases, necessary – as this might be, it should be a last resort, with those in the know suggesting that such a move is likely to have “a detrimental effect on future retirement incomes”. In other words, it would be a short-term gain, but a long-term loss.
With the number of workers per retiree expected to reduce from five in 2019 to just two by 2051, it is crucial for people not to rely too heavily on the current State pension. The latter statistic, combined with our longer life expectancy rates, means that not only is it unclear as to what the State pension will be able to offer retirees in 30 years’ time, but it’s becoming more and more likely that we’ll have to make do for longer on lower retirement incomes.
This is all the more reason to keep contributing to that pension pot while you can – and to leave it untouched until the time comes.
Invest as much as possible in the final working years
The tax incentives available on pension contributions increase as you get older – good news indeed for those starting a pension fund later in life. The current rules state that those aged from 50-54 can contribute 30% of their net relevant earnings tax-free. This increases to 35% over the age of 55, while those aged 60 plus will receive tax relief on a whopping 40% of their net earnings.
With such incentives readily available – paired with the fact that many professionals reach their highest earning potential over the age of 50 – there is huge scope to save a substantial amount during the latter working years that will enable you to fund a lengthier retirement phase.
It’s never too early to plan your pension
By the time retirement comes around, the vast majority of working professionals will have become accustomed to a certain lifestyle and quality of life. To maintain this standard as a retiree, it is estimated that an individual will need to save two-thirds of their pre-retirement income per year to live comfortably.
This serves as a stark reminder that it’s never too early to start paying into your pension. Investing early means you can ride the peaks and troughs of market fluctuations with less stress, giving yourself time to recoup any losses incurred along the way, while continuing to build up that fund.
For those who are availing of employer contributions, early planning means your pension pot will benefit from this added boost for a longer period of time. The pandemic has seen 11% of employees having their contributions stopped altogether, and a further 15% having their contributions reduced. The longer you’re in the game the more chance you have to eventually recoup these costs.
Get expert advice
Navigating the world of pensions, particularly when you have aspirations to retire early, can be a tricky task. Add to this the financial uncertainties thrown into the mix by the pandemic, and it can be difficult to get your head around where to go from here or even where to begin. This is why seeking expert advice is a shrewd move.
As experts in retirement planning, Symmetry Financial understand how daunting the pension planning process can be. Whether you have just started your working career, or you are nearing retirement age, we are here to make planning for a comfortable retirement easy.
Depending on how far or near you are to retirement, you will have different decisions to make. Our team of financial advisors are on hand to help you assess your financial goals and put a plan in place to achieve them.
Schedule an appointment with Symmetry Financial today to discuss planning your pension and your options for early retirement.