How to make early retirement a reality

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Trudging off to the office on a Monday morning the thought of retiring early is something many of us dream about. But if you want to want to wave goodbye to work, indulge yourself in your favourite hobbies and travel the world, then you’ve got to put proper plans in place.

Early retirement might seem like a pipedream, but with a sound plan, a swift start and a concerted effort you could turn it into a reality. Making a quick start on your financial plans for retirement is so important because the sooner you begin saving the longer you’ve got to take advantage of income tax relief and any pension contributions made by your employer. Your money will also have more time to benefit from any investment growth although there is no guarantee the value of your investments will rise. 

Be precise and practical when planning for retirement 

But before you start saving into a pension and dreaming of days spent at the golf club, it’s important to really think about the lifestyle you’d like in retirement and how much it’ll cost.

Using our online calculator you can work through the essentials, desirables and luxuries of your planned lifestyle in later life and get an idea of just how much it’ll cost. Once you know the retirement income you’ll need, you can then calculate how much you’ll have to save to generate it.

And once you’ve got a target to go at, it can be a lot easier to start thinking about how much you’ll need to save to get there. 

A helping hand from HMRC

The good news is that there’s help on offer if you start a pension to save for retirement. Normally primed to take your money away, the taxman offers income tax relief on your personal pension contributions, limited to the higher of £3,600 or 100% of your annual earnings.

This limit is subject to an Annual Allowance, which is set at £40,000 for the 2015/16 and 2016/17 tax years. If your total pension contributions (including those made by your employer) exceed the Annual Allowance in any one tax year then you’ll have to pay a tax charge.

Higher earners should be aware that their Annual Allowance could be reduced to as little as £10,000 following changes to be introduced from 6 April. 

Income tax relief in action

Your pension provider will automatically claim income tax relief on your personal contributions and add it to your pension pot. This means that for every £80 you put into your pension HMRC will add another £20.

And so every £100 that goes into your pension only costs you £80. If you’re a higher or additional rate taxpayer it’ll cost even less because you can claim further income tax relief on your pension contributions through your self-assessment tax return. 

Take advantage of your workplace scheme

And help’s not just on offer from HMRC when it comes to retiring early. Auto-enrolment legislation means that by February 2018 every employer in the UK will have to automatically enrol eligible employees into a workplace pension.

The legislation sets out minimum contributions that employees and employers have to make and from 6 April 2019 employers will have to contribute 3% of your salary to your workplace pension.

That’s essentially free money going straight into your pension pot and helping you to grow your savings for retirement. You can opt out of your workplace pension if you want, but if you’re serious about retiring early you should think twice before passing up on these employer contributions.

Spending patterns and retirement planning

When people talk about retiring early they often put a focus on how much they’ve got to save to achieve their goal. But how much you spend will also impact your ability to hit your financial goals for later life.

As we go through our careers, most of us tend to earn more and improve our standard of living. But if you spend every extra penny you earn, it could hamstring your chances of retiring early.

There’s no need to forgo every possible pleasure, but it’s worth keeping an eye on ‘lifestyle creep’ and asking if you’re really getting the best value out of the things you spend your salary on. If not, the cash could be counting towards a longer retirement.

Instead of dreaming about early retirement why not start working on the financial plans that will let you actually do it.  

Planning for early retirement – stop dreaming and start saving 

  • Picture your lifestyle in retirement 
  • Work out what it’ll cost
  • Decide when you’d like to retire
  • Start saving early
  • Make the most of income tax relief
  • Take advantage of employer contributions if possible 
  • Actively manage your  pension pot