Tips for an early retirement

What is early retirement?

Early retirement generally means giving up work before you reach your normal pension age (NPA). This can vary depending on your profession. For members of specialist pension schemes, such as the Teachers’ or NHS pension schemes, it’s typically the age at which you begin taking your pension benefits. For others, it’s usually the age at which you start receiving your state pension. The current state pension age is 66, but it will rise to 67 by 2028.

The steps you take throughout your working life will affect your chances of achieving your retirement dream. This guide aims to give you some pointers that could help set you on the path to retiring sooner.

Save early, save often

If you intend to retire before your normal pension age, you’ll need to self-fund your lifestyle. You’ll also need to ensure you have enough to keep you comfortable throughout your retirement.

Whether it’s via a pension, investments, savings or another source, the earlier and more frequently you pay into the pot, the more you’ll potentially have to see you through.

Determining if you’ll have the financial freedom to retire early, based on your current financial situation, is something financial advice from an expert can you help with.

Maximise pension contributions

Unlike the state pension, you can access a workplace or personal pension from 55 onwards (rising to 57 in 2028). This is known as the normal minimum pension age (NMPA). The value of your pot, when you reach NMPA, will be a key indicator of whether you can retire now or in the near future, or if early retirement isn’t possible.

These pensions provide the financial bedrock for many retirees and allow you to build up a pot of cash over the years. This receives tax relief from the government. The amount of tax relief depends on your status as a taxpayer.

Workplace pensions also benefit from employer contributions, which must be a minimum of 3% of your earnings, although some employers may match employee contributions or even enhance them with an additional percent or two on top. Meanwhile, you pay in at least 5%, taking the minimum amount contributed per month to 8%.

Make the most of employer contributions

It can be seen as free money from your employer, making a workplace pension a more effective way to save for retirement than taking your full salary and putting the same amount into some form of savings account.

Both personal and workplace pensions are usually invested, with the benefits of a defined contribution pension dependent on how the investments perform*. If it performs well, your pension pot will grow steadily over your working life. So, the earlier you start contributing, the larger it’s likely to be when you retire.

Paying in as much as you reasonably can (without exceeding your £60,000 annual allowance), and avoiding unnecessary breaks in payments, can help keep you on track for your retirement goals.

* For the less common defined benefit pensions (such as the NHS or Teachers’ Pension Scheme), a pre-determined retirement income based on your salary and length of service is paid.

Invest beyond your pension

Although most pensions are investments, they’re not the only kind you might consider if planning to retire early. Other long-term investments, such as stocks and shares ISAs, unit trusts and Lifetime ISAs can also help build a pot of cash to draw on in retirement.

A stocks and shares ISA, for instance, lets you invest up to £20,000 each year with no tax to pay on any resulting growth.

These types of ISA are relatively simple to open and are invested in the stock markets. There is often the option of a managed fund too, which will have a dedicated fund manager. They will decide where to invest and when to sell, so you don't have to keep an eye on the markets yourself.

A stocks and shares ISA can be rewarding if the investments perform well, and historically they’ve outperformed cash savings over the long term. This makes them another option to consider on the path to early retirement.

Keep in mind that the value of your investment can go down as well as up, so you could get back less than you invested.

Pay off your mortgage

If early retirement is your goal, then any kind of debt should be cleared by the time you give up work.

The largest debt many take on during their lifetime is a mortgage. The loan has traditionally been taken out over a 25-year term. In recent years, however, 30-year and even 35-year mortgages have become more popular. This is largely due to rising house prices.

A mortgage can be a major barrier to early retirement, as it takes a significant portion of your monthly income. But if it’s paid off by the time you retire, it won’t be a concern.

Adding a little extra on top of your monthly repayments can help to reduce the amount of interest payable on your mortgage. This can help shorten your mortgage term, letting you clear the debt sooner.

Could you get a better return from savings?

Before committing to overpayments, it’s worth finding out if the extra you intend to pay would be better off in savings. If there’s a savings account offering a better return rate than your mortgage rate, this may be the case, but it’s not always straightforward. Seeking financial advice beforehand can help set you straight on which is the better option for your circumstances.

Is there a limit to how much you can overpay your mortgage?

Many mortgage lenders place an annual limit on the amount you can overpay your mortgage by. For many, this limit is 10% without penalties, so it’s worth checking the details of your mortgage to make sure you don’t get charged for additional payments.

Live below your means

To save more money for an earlier retirement, you may have to reign in your spending. If this is the case, you should be particularly careful when it comes to what’s known as ‘lifestyle creep’.

This refers to the gradual increase in spending that often happens as your earnings grow. It can eat into your disposable income, using money that could be better put toward saving, investing, maximising pension contributions, or topping up your mortgage repayments.

To avoid lifestyle creep and put extra income into funding an earlier retirement, it’s important to keep an eye on your spending.

A penny spent, is a penny less saved

Outside the unavoidable costs such as bills, essentials, repayments etc, it’s worth looking into where else your money goes. Identify unnecessary expenses and look for areas where you can save. You can then put the extra cash towards your retirement fund.

This doesn’t mean a life of austerity though. Living below your means shouldn’t see you missing out on all your comforts. But setting a monthly spending limit and sticking to it can help you set more aside for the future.

Start now, retire sooner

Retirement at the normal minimum pension age isn’t possible for everyone. However, if you’re able to put aside some money each month, retiring before your normal pension age may be achievable.

Regular pension contributions, started early, can put you on the right path to reaching this goal, especially if you have access to a workplace pension that benefits from employer contributions.

But if your budget allows, contributing to a pension, an investment account, and being smart with your mortgage could help maximise your retirement pot and bring early retirement within reach.