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Why retiring early is harder than you think

Updated 07 December 2022

6min read

Nick Green
Financial Journalist

Brits still have unrealistic expectations of when they’ll be able to retire – and it’s a worrying sign of how little they think seriously about their pensions. Nick Green compares the dreams with the realities and explains how to bring them closer together.

Young people dream of early retirement

Young people today don’t know they’re born – or at any rate, don’t know when they’ll retire. This is the terse conclusion of new research by Hargreaves Lansdown, which found that adults aged 34 and under expect to retire when they’re 63, on average, and that one in eight aim to be retired by age 55.

Retiring at 55 has been a popular goal ever since the government introduced pension freedom, making it possible to access a pension pot from this age. However, these one in eight younger adults have clearly missed the memo that from 2027 onwards, pension freedom age will rise to 57. This suggests that they haven’t yet given the issue much thought, which doesn’t bode well for their early retirement plans.

Adults who are closer to retirement – and who therefore have a much better view of the pitch – are far less upbeat. Those aged 55 and over expect to retire at nearly 68 years old on average, and one in five think they’ll be over 70. The study also found that this pessimism is growing, with expected retirement ages up by nearly a year since 2017.

The current average age for retirement is 64 (and eight months), although the current state pension age is now 66 and set for further rises in the future. So already retirees are having to bridge the gap between retirement and state pension age by using other sources of income such as their private pensions – and this trend shows no sign of slowing in the years ahead. Today’s workers face a tough challenge simply to retire at a similar age to their parents – never mind retiring any sooner.

Retirement is changing – but the young haven’t noticed yet

The younger half of the workforce may be in for a ‘nasty surprise’ if they continue to be complacent, according to Sarah Coles, personal finance analyst at Hargreaves Lansdown. She says, ‘Those under the age of 35 have high hopes of early retirement, which gradually recede as harsh reality kicks in. We see today’s retirees downing tools in their early sixties, picking up their largely defined benefit pensions, and settling in for a comfortable retirement – and we assume we can do this too, at roughly the same age.’

However, she goes on to point out that most workplace pensions today are of a different type, defined contribution, which although still very good value tend to be less generous, and do not offer the same kinds of guarantees about income levels. In other words, looking at today’s retirees is a very poor yardstick for a retirement that may happen 20, 30 or even 40 years from now. Sarah concludes, ‘The only way to retire when we want is to take control of our pension while we are as young as possible.’

Retirement realities: a look at how it’s going

The Great British Retirement Survey published last year did much to demolish the cliché of the tanned, silver-haired couple on the cruise ship, by revealing the true pressures and concerns facing retirees in modern Britain. That study found that over half of people currently working expected to continue working part-time in retirement, with one in five expecting it to be necessary to make ends meet.

More than 6 in 10 people expected that they’d be at least partly reliant on their spouse’s pension – the majority of these being women whose own pensions are lower due to career breaks and/or lower earnings overall. But this state of affairs puts the dependent partner in a vulnerable position if the relationship should break up, as pensions can be one of the most valuable assets in a divorce. Even more worryingly, some lower-earning spouses admit to paying into their partner’s pension (probably to get higher-rate tax relief) rather than build up their own. What might seem to be a smart move can seriously backfire on the partner without the pension, if the marriage breaks up.

Unsurprisingly, financial security in retirement is the biggest concern for those not yet retired, and the thing that existing retirees value the most. Perhaps surprisingly, given the wider pension options now available, nearly all (98%) of pensioners who had bought annuities do not regret their decision to do so. What did worry retirees in 2019 was the prospect of a stock market crash, since those who have chosen drawdown remain reliant on their investments. These fears were justified when a crash did happen very soon afterwards due to the pandemic, so those with drawdown need to be aware of how to manage a pension pot during a market dip.

Despite their apparent optimism about early retirement, those still in work do admit to money worries: nearly half are anxious about either running out of money (26%) or the rising cost of living (23%). But these anxieties still increase among those who are actually retired, with one in three concerned that their pension may run out. Tax is also a big issue for one in four retirees.

In light of this, it’s telling that those who have already retired place a far higher value on financial advice than those who have not yet reached this watershed. Just one in five people pre-retirement said they would consider a financial adviser for retirement advice, whereas nearly one in three (29%) of retirees continue to pay an IFA on an ongoing basis, with many more having consulted one at the point of retirement. People not yet retired seem to prefer doing their own online research, reading the financial press and using the government’s free Pension Wise guidance service. However, none of these options can offer genuine advice on a person’s individual situation, and personal research often tends merely to confirm one’s existing views. With peace of mind such a high priority for retirees, the advice they have received seems to been good value for money.

The self-employed neglect pensions at their peril

Of particular concern at present are the large numbers of self-employed people in the UK who appear to be neglecting their retirement savings. Around 15% of the country’s workforce are self-employed, totalling some five million people. According to the Institute for Fiscal Studies (IFS), just 16% of these (i.e. 800,000 people) are currently saving into a private pension, leaving 4.2 million without any actively growing retirement funds. This is a striking decline – at the turn of the millennium, nearly half of all self-employed workers had a private pension.

The IFS has investigated whether the self-employed are simply preferring more liquid savings such as ISAs or stock market investments, to explain the decline in pensions. The answer appears to be, ‘No’ – this kind of saving has also declined among the self-employed. The IFS report states, ‘It therefore does not appear that these financial assets are acting as a substitute for pension saving among the self-employed.’

Tom Selby of investment company A J Bell observes that auto-enrolment was highlighting the pension gap between employed and self-employed. He says, ‘The [auto-enrolment] reforms do not cover almost five million self-employed workers, the majority of whom are not saving in a pension at all and risk facing severe financial difficulties in later life. Make no mistake about it – without urgent action, there is a real risk millions of people will sleepwalk into retirement misery.’

Tom suggests that the Lifetime ISA (LISA) may offer an alternative solution for self-employed workers worried about tying up too much of their money in a pension. A LISA offers some access (with restrictions) to your money before the age of 60, so the money can be drawn upon in emergencies. It also offers a 25% government bonus comparable with pension tax relief. However, the total amount you can pay into a LISA is much less (£128,000) than for a pension (from which you can draw up to £1m), so LISAs should really only be seen as complementary to pensions, rather than as substitutes for them.

The good news: early retirement is still possible

It’s clear that saving for retirement isn’t as easy as it used to be, and also that many younger workers today are underestimating the challenges ahead. But the young still have one very important factor on their side, which is that they are young. Time, even more than income, is the single biggest factor when it comes to pension saving – to the extent that a 20 year old can save nearly double the pension that a 40 year old can, despite earning only half the income. Compound interest means that time literally is money – so the biggest obstacle to early retirement is simply failing to think about it far enough in advance.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.