When Can You Retire?
Is it possible to retire at 60 when the State Pension Age is 67/68?
This is such a common question. Many business owners and professionals aim to wind down early, wanting time to travel, see family, or pursue hobbies while they’re still active. But is early retirement financially feasible? Let’s break it down.
6 Considerations when planning your retirement age
1. Assessing Your Financial Readiness
To bridge the income gap from 60 to 68, you’ll need sufficient savings, investments, and pensions:
- Savings & Investments: Assess if your accessible funds can cover expenses until the state pension kicks in. Use tax allowances effectively to maximise returns.
- Pensions: Consider your current contributions and investment strategy. If you’re not contributing yet, start now—even small additions can grow meaningfully.
- Mortgage Status: Check if your mortgage will be paid off by retirement; clearing this cost can make early retirement more affordable.
2. Contributing to a Pension After 50 Still Makes Sense
Even in your 50s, pension contributions offer substantial benefits, especially for business owners:
- Limited Companies: Company contributions to your pension reduce corporation tax, making pensions a tax-efficient way to build retirement funds.
- Sole Traders: Personal pension contributions offer 20% or 40% tax relief, significantly boosting savings potential.
- Carry Forward Rules: Use past years’ unused allowances to increase contributions in profitable years.
- Flexible Access: From age 55 (57 from 2028), you can begin drawing from pensions, bridging income gaps before state pension age.
3. Tax-Free Cash: A Valuable Tool for Early Retirement
Most pensions allow you to take up to 25% of your pension pot as tax-free cash. This can be a powerful way to fund early retirement without increasing your taxable income:
- Initial Retirement Costs: Use tax-free cash to pay off your mortgage, make home improvements, or cover large one-off expenses like a car or travel plans.
- Income Bridging: Tax-free cash can supplement your income between ages 60 and 67, reducing the need to draw heavily from taxable sources.
- Business Transition: If you’re stepping back from your business, tax-free cash can provide a financial cushion during the transition, allowing you to restructure or sell the business without immediate income pressure.
- Protecting Investments: Using tax-free cash for early retirement needs means you can leave other investments to grow, ensuring a more sustainable long-term income.
It’s important to balance how much you withdraw with your overall retirement goals. Taking too much tax-free cash early could reduce your long-term pension income, so it’s vital to plan carefully.
4. Tax-Efficient Investment Strategies
Small business owners can benefit from tax-efficient investments tailored to their structure:
- Pensions: These reduce corporation tax for company owners and provide tax relief for sole traders.
- ISAs and GIAs: Maximise pension contributions first, then consider ISAs for tax-free returns outside of a pension.
- Bonds: Bonds can help manage capital gains, adding flexibility to your tax strategy.
5. Creating a Flexible Income Stream
Flexible income options let you adapt your retirement plan to fit changing needs:
- Flexible Withdrawals: Adjust pension withdrawals annually to suit your lifestyle.
- Fixed Income: Choose fixed income products for stability.
- Combination Approach: A mix of flexible and fixed options provides adaptability and security.
6. Cash Flow Forecasting: Ensuring Your Plans Are Robust
Cash flow forecasting can map your income and outgoings to ensure your savings will support your retirement. This lets you spot potential gaps and make informed decisions on when and how to retire.
Ready to Plan Your Early Retirement?
Retiring at 60 may be achievable with careful planning, tax-efficient strategies, and a personalised approach to savings and pensions. Whether you’re a business owner, self-employed, or a company director, I can help you build a plan suited to your lifestyle.
This article is written by Sam Kmieciak, Chartered Financial Planner, Aegis Financial Planning Ltd, by invitation of Hargreaves Owen Chartered Certified Accountants based near Baldock, Letchworth and Hitchin.
For a free, no-obligation consultation, please contact Sam via or 07850 746939.