Five steps to boost your chances of early retirement

Financial planning
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Many dream of early retirement but achieving it can be easier said than done. Here are five ways to improve your chances.

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27 February 2024 | 5 minute read

If early retirement is your financial objective, there are several steps you could take to improve your chances of reaching this goal.

By taking a disciplined and tax-efficient approach to saving, you may be able to set aside enough so that you can stop working earlier than the traditional retirement age.

Here are five positive steps you can take towards retiring sooner rather than later.

Step one: Maximise employee benefits

If your employer offers a workplace pension scheme, see if increasing your pension contributions is a possibility.

Under auto-enrolment, the minimum total contribution will be 8% for most people. Employers are obliged to contribute at least 3% of your ‘qualifying earnings’ each year (£6,240 to £50,270 in the 2023/24 tax year), while employees must contribute 5%.

However, if you’re able to save more into your workplace pension this could make a substantial difference to the amount you have in your retirement pot. Some employers will match your pension contributions up to a certain percentage, so it’s worth finding out how your particular scheme works to make the most of it.

Alternatively, if your employer offers a salary sacrifice option, you could give up some of your salary in return for increased pension contributions, which could result in National Insurance savings.

Step two: Make use of carry forward

You may have unused pension annual allowances from previous years that you could use to boost your pension and chances of early retirement. The pension annual allowance is £60,000 for the 2023/24 tax year. You can carry forward unused annual allowances from the previous three tax years, potentially enabling you to boost your pension by an additional £180,000.

To use carry forward, you need to have used up your annual allowance for the current tax year, and to have been a member of a UK-registered pension scheme in each of the tax years you want to carry forward from. You need to use any unused allowance from the earliest year first, and you can only go back three years. Individual carry forward pension contributions must be supported by relevant UK earnings. Note that carry forward calculations can be complex, so it’s recommended to seek advice before proceeding.

If you earn more than £200,000 (known as ‘threshold income’) and your ‘adjusted income’ is more than £260,000, your pension annual allowance starts to fall. This is known as the ‘tapered annual allowance’. For every £2 your adjusted income goes over £260,000, your annual allowance for the current tax year reduces by £1. The minimum reduced annual allowance you can have in the 2023/24 tax year is £10,000.

Step three: Save tax efficiently

Pensions and ISAs are often seen as the foundation of tax-efficient retirement planning. Your investments in both are free from capital gains tax (CGT) on any gains you make over the years. ISAs don’t offer tax relief on your contributions, but withdrawals are tax-free. By contrast, any withdrawals from your pension beyond your 25% tax-free lump sum (received during your retirement) will usually be liable to income tax at your marginal rate.

ISAs can be particularly valuable if you’re hoping to retire early, as they can help you build up your savings and provide you with more flexibility in retirement. Your ISA investment isn’t eaten into by CGT or income tax, so over time compounding can supercharge the growth. You earn returns, and those gains are reinvested and earn returns, too.

If you’ve more to save once you’ve maxed out your ISA and pension allowances, you could consider tax-efficient alternatives, such as venture capital trusts (VCTs). VCTs offer 30% income tax relief and tax-free dividends, so can form a valuable part of a diversified portfolio. However, they are specialist, high-risk investments, so are not suitable for all investors.

Step four: Assess your retirement savings

Saving for an early retirement will involve considering what you want to spend your time doing, and how much this will cost. Your retirement income could come from a variety of sources.

These may include a defined contribution pension, from which you can start withdrawing money at age 55 (rising to age 57 from April 2028). If you have a defined benefit pension, you’ll receive an income based on your salary and length of time you were a member of the employer’s scheme, which is payable from the scheme’s retirement age.

Shares, ISAs and property may all form part of an early retirement plan. You may use savings in ISAs and other accounts to provide or supplement your income in early retirement, before you access your pension benefits.

Step five: Seek professional advice

Whatever your retirement dreams, you’ll need a financial plan to give you the best chance of making them a reality. A financial adviser can help by working out how much you need to have saved to generate the income you need in retirement. This may take into account various factors such as life expectancy, investment growth, tax and inflation.

An adviser builds a retirement plan that’s tailored to your needs and circumstances. They may use cashflow modelling to ensure your money won’t run out in retirement, and develop a plan for maximising your retirement savings. The earlier you start planning, the better your chances are of achieving your goal of early retirement.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.

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The value of investments and any income from them can fall and you may get back less than you invested.