So you want to retire at age 50, but your company pension plan will not start to provide you with an income until you reach 60 or 65. Maybe you own a business or have a significant shareholding in a company but you cannot take income from your personal pension plan until you reach age 60.
How can you bridge the gap and ensure an adequate income until you can get a pension?
A big win on the Lotto, Who Wants to be a Millionaire, or the horses, or a hefty inheritance should allow you to live comfortably after taking early retirement or opting for redundancy.
But with the odds firmly stacked against that sort of good fortune, anyone who wants to retire comfortably at 50 would need to start their retirement planning well in advance. Taking early retirement is probably easier for a self-employed person or company owner than for PAYE workers, under existing pension rules. People who have built up successful businesses or companies could sell them to generate the funds to retire early. Approaching age 50, the owner could concentrate on driving the company's profits ahead with a view to selling the company at the best possible price. At the same time payments into their personal pension plan could be increased. When the business is sold the funds raised could be invested to provide an income until the personal pension plan can be drawn down. It is important to get good advice to minimise the tax due on the sale of the business/company. Under certain conditions there are tax reliefs for business people selling their business assets or shares in their company after they have reached 55 years. So planning your exit and timing the sale can make a big difference to the net amount left to fund retirement.
Owners who have invested in a personal pension plan over their working lives can start to access at age 60 the funds built up over the years and can therefore add to their retirement income.
People starting into their work lives now could look for opportunities to start their own businesses which could eventually be sold or floated on a stock market. Matching the success of the dot.com millionaires would be one way to ensure they could afford to retire early.
But for most people the only way to try to provide for retirement at 50 is to start saving and investing as early as possible. You should aim to build up a portfolio of assets that can be used to provide an income over your retirement period. It is important to bear in mind that the earlier you retire the longer this retirement period you must fund will be.
One of the most effective ways of saving is through a pension plan. Experts advise that about 15 per cent of gross salary should be put aside to fund a personal pension plan. The earlier you start a pension plan or become part of a workplace scheme the better. And the more you can invest the better. The value at age 50 of a pension plan based on monthly contributions of £250 would be about £335,000 for a person who started contributing when they were 25 years but just £110,000 for someone who started at age 35 (see panel). People in employment should establish whether there is a workplace pension plan and then assess the plan to see what it will provide. The best pension plan will guarantee two-thirds of final remuneration at age 60 with a built in annual cost of living or inflation related increase every year.
But there are a wide variety of plans. Anyone with a plan providing less than two-thirds of final salary should try to make additional voluntary contributions to build up a separate fund that can be used to top up their company pension entitlements. Employees can get tax relief at their marginal tax rate each year for payments made into an AVC fund of up to 15 per cent of their annual remuneration. Therefore the net cost after tax of paying in £250 per month would be £140.
Self-employed people can set up their own personal pension plans to build up funds for their retirement. Attractive tax breaks which increase with age are available on payments made into these funds. Under the new Approved Retirement Funds the saver can decide on retirement how to invest the funds built up. But he/she cannot access the fund until aged 60. Ensuring the best possible pension provisions should mean a reasonable income from age 60 or 65. But it will not ensure that you can retire at 50. It will help because you should have already largely funded the post 60/65 period of your retirement.
What about the 10 to 15 years between 50 and 60 or 65? The aim should be to start as early as possible to build up assets that can be used to provide income over this period. Short of a getting a big win, inheritance, redundancy lump sum or resorting to a life of crime there is no easy way to build up assets. If you really want to retire early you need to make some sacrifices now. Look at your spending. Can you cut back to fund for the future? Providing for a pension and saving for the future are not usually important financial priorities for people in their early working lives. Most younger people are either too busy trying to fund mortgages or just enjoying their first taste of financial freedom to consider starting off a long term commitment like a pension plan. It is easy to be wise in hindsight but the sooner you are able to start saving and investing in assets that should appreciate over time the better. There are a range of possibilities with varying degrees of risk attached from shares to property. But the aim should be to build a balanced portfolio taking more risk in the earlier years to try to speed up growth and reducing risk over time.
One way to retire at 50 would be to accept a voluntary redundancy offer from your employer. Some employers still want to change their older, more expensive workers for younger, less expensive models and redundancy may suit some older workers who do not want to remain in stressful jobs. Employees looking at redundancy should consider their positions carefully. A significant portion of the ex gratia redundancy lump sum could be taxable. This tax, repayment of debts and unexpected expenses could very quickly eat into what initially looks like a large sum. How many years are left before you will get pension payments? Is the employer providing for early pension payments? If not, employees will have to use their lump sums and any other savings they have to provide incomes until their pensions come into effect.
Leaving early may mean a significantly reduced pension. Pensions are usually based on years of service and a full two-thirds pension would usually require 40 years of service. Leaving after 30 years would reduce that pension to one half. And it would be half of a lower amount, because pensions are usually based on your salary at the date or year of retirement.
Often the redundancy option is taken in conjunction with other financial planning. In some cases the person opting for redundancy has already lined up a less stressful or part time job to provide an income until their pension starts. They could plan to release extra funds through selling their home and moving either to a smaller house or a lower cost area. In some cases people opt to move abroad to areas where the cost of living is lower and their assets/income go further. In any move to a non-euro area a retiree should take into account the effect of currency fluctuations on the value of the euro assets/ pension.
