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By Harvey Jones
The phrase “early retirement” seems to belong to an earlier, comfier age, because today all the talk is about is working longer and later. Next year, new rules will make retiring early that much harder. Five years harder, to be precise. Because from 6 April, the minimum age at which you can draw your private pension is set to increase from age 50 to 55. By private pension, I mean any personal or occupational pensions. I do not mean your state pension, which you are unable to draw until age 65 if you are a man or 60 if a woman (these ages are also set to rise). Get out - now! I will admit most of you will not be in a position to retire at 50, or for that matter 55, 60, 65 or maybe even 70. But some people will want to access the tax-free cash and income from their pension fund, perhaps to support them if they shift to part-time working. Anybody who is either wealthy or desperate enough to want to quit the rat race early should get moving, before your escape route is blocked for five years. Time is short Do not leave it to the last minute to start planning, because pension trustees are not the speediest people on the planet, and neither are pension companies, which means it could take up to three months to sort your pension application. You do not want to spend next March desperately screaming down the phone BUT I WANT TO RETIRE NOW!, before that 5 April deadline locks you into the your loathed occupation for another five years. So get started now. Make the rest of us jealous. Go do the maths! If you are thinking of retiring early, whether at 50, 55 or whenever, you need to do some careful sums. If you retire before the state pension age, you will have to rely on your own private pension and other savings to plug the gap until you can claim your state pension. That gap is likely to widen, as the state pension age is steadily pushed back. Between 2010 and 2020, the retirement age for women will rise to 65, to bring it in line with men. If the Tories win power, the male state pension age will rise to 66 in 2016, with women to follow shortly after. And even if the Tories blow their chance of power, under legislation introduced by New Labour the state retirement age for men and women is set to rise to 66 from 2024, to 67 from 2034, and 68 from 2044. So if you retire early you might need to pay your own way for a decade or two, before the state steps in and picks up some of the burden. Only investment bankers need apply So how much pension and savings do you need? The earlier you retire, the more you need, because the money has to stretch out over a much longer period. A single man retiring at 55 would typically be able to buy a measly £3,000 of annual income for every £100,000 he has in his pension pot (assuming he chose an escalating annuity, which rises in line with prices). You will not need telling that this is not very much to live on. If he retired at 50, he would get even less. Even if he had a massive £500,000 in his savings pot, in other words he is an investment banker, he would only get £15,000 a year at 55. If he bought a level income that does not rise with prices he would get £5,800 a year for each £100,000, but there is a good chance inflation could ravage the value of his income. It is even worse for women As you get older, your money buys you a bigger income. By age 65, a single man would get an index-linked £4,400 for every £100,000 in his pension pot, or £7,100 level income. But that is still a depressingly low figure, and if you are a 65-year old woman the figures are even worse at £4,000 and £6,600 respectively, because your life expectancy is several years longer. I should point out that all these figures may change if you have a serious illness, because that cuts your life expectancy and boosts the amount of pension income you can get. If thats you, look for an impaired life annuity. Some relief If you plan to retire early and have cash to spare, you could quickly pump it into your pension to boost your pot with 20% or 40% tax relief. You can claim tax relief on a sum equivalent to your full annual earnings, up to a maximum £245,000 in the current tax year. Face facts You might think it is disgusting that politicians are telling us we all have to work longer, but the truth is that we have little choice. Many in the pensions industry are in favour of raising the state pension age to 70 – from tomorrow. They claim that is the only way to solve the pensions crisis and the black hole in the nation's finances. For most of us, early retirement is a pipe dream. If the idea still tickles you, and you are young and well-paid enough to give it a go, then start saving now. Frantically. If not, I hope you like your job. More from lovemoney.com Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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