Personal Finance

Could your pension be big enough to retire at 55?

Could your pension be big enough to retire at 55?

When you think of life goals, chances are you’re dreaming of financial freedom and a long retirement. Maybe you’re telling yourself it is a distant fantasy, but don’t be so quick to despair of your retirement prospects. The reality is that the action you take now could mean enjoying an earlier retirement. Here’s the secret on how to retire at 55…

Start early and invest regularly

Little and often investing, over a long period of time, could mean you are able to retire at 55. The earlier you start, the more likely you are to benefit from the positive effect of compound returns. This works by earning growth upon growth as well as the initial investment. The more time you have, the more compounding can take effect!

How much do you need to retire at 55?

Time is on your side to make the most out of tax allowances and maximise your Pension’s potential. Our own ‘Tackling the Savings Gap’ research shows that an income of £23,000 is needed annually in retirement to live comfortably. However, based on actual savings behaviour, people in the UK are on course to receive an income of just £6,000 per year from their retirement fund.

The key to avoiding a Savings Gap is to invest earlier, with regular contributions that will eventually culminate in a big enough retirement pot. A good rule of thumb is to multiply your annual income needs by 25, so to retire on £23,000 aim for a pot of at least £575,000.

How much do you need to contribute a month to get there? What might help?

If you started investing £500 a month at the age of 25, with an assumed growth rate of 5% a year after fees (such as for holding a fund), you could have built a pot worth £418,000 by the age of 55.

Of course, you’ll need more than £418,000. We’re all living longer, and early retirement could mean you’ll have to fund many more decades of life. Thankfully, there are ways to supercharge your Pensions.

With a Workplace Pension, you’ll also benefit from employer contributions topping up your investment. Your employer typically contributes a minimum of 3% of your salary. With you and your employer contributing towards your retirement, the prospect of retiring at 55 isn’t so unrealistic. You’ll also benefit from tax relief on your workplace pension, which means you’ll save the income tax you would have paid on that money. This is particularly beneficial for higher rate taxpayers.

And don’t forget, if you have 35 years of national insurance contributions, you’ll also benefit from the state pension. This could be worth up to £8,546 per year, and you’ll receive it from your state pension age.

Another factor in achieving an early retirement is to consolidate your pensions into one. You’ll likely have several employers in your career, and inevitably you could end up enrolled in different workplace pensions. This could mean your ultimate pension pot value is watered down by poorer performing funds or higher charges. Instead, look to consolidate your pensions into one. With just one low cost and a fund that performs well, you are giving yourself a better chance to retire at 55.

What about risk?

If you are starting to invest from a younger age, you can potentially take more risk in an aggressive portfolio, as you’ll have more time on your side to ride out the volatility. This could potentially mean higher returns over the long run, helping you achieve the dream to retire at 55.

As you get nearer to retirement, you can amend your portfolio to be more defensive. You’ll also likely be in a position where you can contribute more money. Our online risk assessment can help you to determine where you should be on the defensive to aggressive investment scale.

Enjoy your retirement

If you do amass a pension pot big enough to retire at 55, you’ll have a few options. You could convert a pension fund into an annuity that pays a guaranteed income, you could withdraw all the money in one go (25% of it as a tax-free lump sum, the rest taxed), or drawdown income as and when you require to minimise the amount of tax you pay.

It all starts by setting a goal and contributing regularly.

Take action today, review your current contributions against your retirement goals.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not investment advice.