Updated 03 December 2020
Working out a realistic retirement age is one of the most important aspects of retirement planning. If you’re asking yourself ‘When can I retire?’, you’ll need to consider a number of factors, including your life expectancy, state and private pension income and outgoings. Here’s how to go about it.
There is no longer any fixed ‘retirement age’ in the UK – you can retire whenever you want. However, the key ages to bear in mind are the age at which you can draw your state pension (soon to be 66 and rising), what age you can access your pension pots (55 or over), and (if applicable) what age you can access final salary workplace pensions (this depends on the scheme, but is usually 60 or 65).
But the age you actually stop working is entirely up to you and your employer(s). Many may continue working well into their 70s and even beyond, while others might be wondering how to retire early. Assuming you want to retire as soon as it is practical to do so, here are the main factors to consider:
You can use our Pension Calculator to get a better idea of when you can retire. It suggests an optimal retirement income based on a percentage of your current income, and works what you need to do to achieve this via your pension pot. Try it out now and see if you’re on course for the retirement you’d want.
In 2019, the average retirement age was 65.3 years old for men and 64.3 for women. This figure has fluctuated over the years, sinking to 63.1 and 60.6 in 1995 for men and women respectively, from highs of 67.2 and 63.9 in 1950. However, one study found that nearly a third of the workforce now expects to retire after their 70th birthday, due to factors such as rising debt in older age, and around 12% of men and 6.7% of women over pension age are still in work. If you want to retire at 55, as some people on moderate incomes still manage to do, you’ll need to plan carefully and start preparing early to beat this upward trend.
First you need to work out your fixed outgoings every month, including bills, loans and mortgage/rent payments. Next, add in regular costs, such as groceries and transport. These are the absolute basics you’ll need to cover to survive during retirement. If your unavoidable outgoings are far higher than your expected combined income, you’ll need to cut back, up your pension contributions or delay retirement to allow your savings to build up.
You might think that, without work-related expenses such as train/bus tickets, you’ll be able to manage on a far lower income. However, you’re likely to spend more on household bills, hobbies and getaways. Inflation is also likely to push the cost of living up over the years – for example, in 1991, it rose by around 7.5%. It has been much lower recently, but retirement is a long time, and it could all change again.
By October 2020, the state pension age for both men and women will have increased to 66. The Pensions Act 2014 also set out that it will increase again between 2026 and 2028 to 67 and to 68 between 2044 and 2046.
If you’re a man born on 6th April 1951 or before, or a woman born before 6th April 1953, you can claim the basic state pension. If you have made 35 years of National Insurance (NI) contributions, you’ll be entitled to the full amount of £134.25 per week. You’ll also be able to claim additional state pension, which has no defined upper limit and is based on your additional NI contributions.
People born after this date will be entitled to the new state pension, which is a maximum of £175.20 per week. Again, you’ll need to have 35 ‘qualifying years’ (earning more than £183 per week in employment, paying the correct NI contributions during self-employment or claiming certain benefits) to get this amount. If you don’t have enough credits, you can pay voluntary NI contributions to increase your state pension.
You can get an idea of how much your state pension is likely to be by requesting a state pension forecast. You can also get more if you defer taking your state pension. The current triple lock will see state pension increase by whichever is highest out of:
Your private pension income will depend on the size of your pension pot and what you’re willing to do with the funds in it. Again, you can use the Unbiased Pension Calculator to work this out. There are a number of ways to take income from your private pension. You can withdraw up to 25% of your pension tax-free, and the rest will be taxed as normal income.
Broadly speaking, you can achieve higher income in the shorter term from drawdown, but this is less reliable than an annuity, which is guaranteed for life. With drawdown, you can eventually run out of money if you take out too much, and/or if the stock market performs badly. The annuity will never run out – the snag is that the annual income may not be as high as you’d like.
Some retirees find that a mixture works well for them: an annuity for reliability, and a drawdown fund for flexibility.
Other sources of income can play a major role in how early you can retire. A popular method is to release some of the equity from your home. This can help you cash in on any increase in value of your home, giving you money to spend now. The downside is that you won’t get as much money for that equity as you would by selling the property, i.e. it can be relatively poor value.
Downsizing is another option, though you should time your move carefully so as not to leave behind a home and a neighbourhood where you feel happy. You might alternatively be able to rent out a room in your existing home to earn a bit of extra income.
Working part time in retirement at something you enjoy (dogwalking is popular and always in demand) can also help to make ends meet.
The average life expectancy for 65 years olds in the UK is 86.5 for women and 84.1 for men. According to data from the Office for National Statistics (ONS), 65-year-old women have a 50% chance of living to 90, while men have the same chance of living to 87. If you’re one of those who lives to be 100+, you could have three or four decades of retirement. Make sure your retirement planning covers you comfortably beyond the average life expectancy, so you’ve got the best chance of keeping a good standard of living until your death.
If you’re in good health and enjoy your job, retiring later will give your pension pot more chance to grow, securing you more income when you do retire. Deferring your state pension can boost the amount you receive, as long as you defer for at least five weeks. It will increase by 10.4% per year for basic state pension claimants and 5.8% for new state pension recipients. However, it doesn’t always pay to wait. If you defer your new state pension for just a year, you’ll need to live for at least 17 years to make it a worthwhile decision.
A financial adviser can help you with all these decisions, as they specialise in helping people plan for a comfortable retirement.
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