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How to retire at 55

Do you know what you need to do if you want to retire at 55?

If you want to take advantage of the pension freedoms available from age 55, here are a few things you should consider 

Under the pension freedoms that came into effect in April 2015, if you have a defined contribution (DC) pension – sometimes also called a money purchase pension – you can access your savings from age 55. 

This might not mean you decide to retire on your 55th birthday, but it does give you more flexibility to choose when and how you stop working - if you can afford it.

Here are a few things you need to think about if you hope to be able to take advantage of the freedoms. 

How early do you need to start thinking about retirement? 

The sooner you start saving the easier it will be to give yourself a more comfortable lifestyle in retirement and have more control over when and how you can afford to retire. 

For example, if someone started to pay £150 a month into a pension from age 20 with a view to accessing their saving at 55, assuming your fund grew by an average of 5% a year, it would be worth over £170,000 . Starting from age 35 – meaning paying into a pension for 20 years – would give you a pension pot of just under £62,000 .

If you’re closer to retirement age, it’s worth thinking about what you might need to live on in retirement and how this compares to your current expected retirement income. If you find that there is a potential gap, you will need to look at how you can increase your income and/or cut costs.

Be sure to take advantage of tax-friendly savings vehicles like your pension fund and ISAs. You could consider taking professional financial advice to find out if your money is working hard enough to help meet your retirement goals, or if any changes need to be made.

Freedoms – take Drawdown or annuity? 

If you want to access your pension pot at age 55, you can take 25% tax free. You will need to decide whether to take the rest of your money as a lump sum, transfer it into a drawdown account or buy an annuity. 

Any income you take from your pension pot (greater than the 25% tax-free lump sum) is subject to income tax at the applicable rate. If you take a lot of money out in one year, you may find yourself liable for a large tax bill. 

You might also want to consider how your pension fund is invested. Traditionally, in the five to ten years from retirement, your pension pot would be switched gradually from being invested in stock markets into bonds and cash, to protect the value of your investment. 

But you may feel this is not suitable if you intend to stay invested and take an income partially from any investment returns, because you would effectively be selling out of one investment to buy back into it later on. 

If you’re unsure about your pension fund’s investment approach, or what investment options are available to you, you may consider taking professional financial advice. 

Retire or semi retire? 

If you’re not ready – or not able – to give up full-time work, then semi-retirement might be for you. Semi-retirement can cover a range of ways of working, including working part-time, either in a new job or perhaps remaining with your employer in a consultancy role, taking extended periods of time off, like sabbaticals or long holidays, or starting your own business. 

If you’re looking to start your own business, you should consider what skills you have that clients may be looking for, what your strengths are, and identify any areas where you might have to retrain or improve.  

You might feel that a portfolio or freelance career is for you [LINK:].  But be aware that being self-employed and working with clients can mean your earnings may be ‘lumpy’ and you might face periods without work and a secure income. 

Property as income? 

Research from Skipton Building Society shows that almost a fifth (18%) of people still to retire believe they will be able to generate an income in retirement from either selling their own home or taking on a second property. 

Retirees looking to take on a second property as a Buy To Let should be aware of incoming changes. From April 2016, purchasers of Buy To Let properties or second houses will usually pay 3% more on Stamp Duty bands. Someone purchasing a Buy To Let property or second home worth £275,000 would see their Stamp Duty bill rise from £3,750 to £12,000.

If you’re thinking about funding a buy to let purchase with your pension pot, remember that taking money above your 25% tax free lump sum will be liable for income tax at your marginal tax rate. 

Budgeting for about half of your life outside of work 

Independent research shows that people regularly underestimate their likely life expectancy by five or ten years. Figures from the Office for National Statistics (ONS) show that those in their twenties are likely to live to see 100, for instance. The average life expectancy for people in England has risen to 81.3 years in 2013, according to figures published in medical journal The Lancet

What’s more, improved medical treatment and diet mean it’s likely that people will spend decades out of the workforce in retirement. Working out how much you need and for how long is key to a comfortable retirement.

If you’re counting on State Pension income to fund your retirement, then you should remember that the State Pension Age is rising. It’s currently 65 for men and will reach 65 for women by November 2018, rising to 66 for both by 2020 and then 67 by 2028. 

Remember also that the age you can access your savings under the freedoms will rise to 57 in 2028 and increase at the same rate as the State Pension Age, so it will be 10 years behind the State Pension Age. 

Do you think you will be able to retire at 55? Let us know below, have your say in the Forum, or head back to ‘Planning your retirement 

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This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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