To retire reasonably comfortably at 55, a couple in the UK are going to need a pension pot of at least £500,000, according to Nutmeg analysis.
How can I retire at 55 versus any other retirement age?
People’s expectations about their retirement age have changed considerably in recent years. Changes to the State Pension age and increasing life expectancy have had a big impact.
Most people are able to access their personal and workplace pensions from the age of 55, though this is rising to 57 from 2028, but whether or not you retire at this age is dependent upon you; your ambitions and your wealth. Can you afford to retire at 55?
What represents a comfortable retirement income differs from person to person. Are you the type that wants frequent trips around the world when you retire, or would you prefer a quieter time with your family? Do you have expensive hobbies, say racing vintage motorcars or are you happier in the garden? Do you have a large home that needs maintenance or are you likely to consider downsizing?
Read more: The different types of UK pensions explained
What is the average pension pot?
According to latest ONS data (April 2018 to March 2020), the average pension pot not yet in payment across all ages above 16 was £32,700.
The median pension pot is shown for the following age groups:
Source: ONS, median (50th percentile point)
What is the State Pension age for women and men?
The State Pension age – the age at which you can start to receive the State Pension – for men and women is currently 66.
However, younger people will likely have to wait a little longer as the State Pension age is currently set to increase up to 67 between 2026 and 2028, and to age 68 between 2044 and 2046 – though these figures are yet to be confirmed.
The number of years you have to make National Insurance contributions to qualify for a full new State Pension is currently 35.
So, if the State Pension age is more than a decade later than 55 – why do many people think about, or aspire to, retiring at this age? The most likely answer is that 55 has traditionally been the age at which people have been able to access income from their personal pensions, and therefore became synonymous with retirement.
In addition, the pension freedom reforms that came into effect in April 2015 gave people much greater flexibility about how they accessed their pensions once they reached 55 – reinforcing the idea of retiring at this age.
Given today’s tough economic climate, retiring early may seem like an ever-dwindling possibility. However, many people fall short of retiring when they want to simply because they don’t start planning early enough. It’s so important to start early and to make the most of the tax allowances, pension plans and other saving and investment options available.
With sufficient planning and movements such as the FIRE movement (Financial Independence, Retire Early) we could see a growing number of people begin to actively map out their lifestyle choices for retirement much earlier on in life.
How much is the State Pension?
The current full basic State Pension, for those with at least 35 years of National Insurance contributions, is currently £185.15 per week (£9,627.80 per year). From April 2023, this will rise by 10.1% to £203.85 per week (£10,600.20 annually).
People with between 10 and 35 years of contributions receive a smaller amount. The exact amount is on a sliding scale, with more years meaning a bigger State Pension. Check how many years you have totted up on the Government Gateway website.
How much will a couple need in retirement?
The size of your retirement fund, and the precise amount you’ll need to save each month to retire at 55, depends entirely on the kind of lifestyle you plan on having in your retirement.
According to research conducted by Which?, couples will need an after-tax annual income of about £28,000 to have a comfortable retirement. This covers all basic areas of expenditure and some luxuries such as European holidays, hobbies and eating out.
Retiring at 55 with £500,000 in the UK
Assuming you retire at 55 and bearing in mind the current life expectancy in the UK is around 79 years for men and 83 years for women, your pension needs to provide income for at least around 25 years. To provide this level of annual income, a couple would need a pension savings pot of just over £500,000 that keeps up with inflation, according to Nutmeg calculations. The savings needed could be reduced to £310,000 when factoring in the couple’s State Pension, assuming they both receive the full amount from 66 years old.
A more luxurious retirement, including buying a new car every five years and taking long-haul holidays, would require an after-tax annual household income of £45,000, which means a pension pot of more than £840,000. The value would be £660,000 if factoring in the State Pension from the age of 66; with income tax considered and State Pension growth at an approximation of inflation at 2% annually.
The value of compound returns
One of the keys to being able to retire at 55 is to give your pension pot as much time as possible to benefit from the powerful effect of compound returns.
To put compounding into context: a 30-year-old who starts putting aside £500 a month into a pension pot with a mid-risk portfolio, assuming 20% tax relief at source, could build a retirement pension pot of around £450,000 by the time they’re 55, according to Nutmeg calculations. This is based on a 5% net of fee and cost annual return with dividends reinvested and contributions rising 2% per year, but does not take inflation into account.
If they’d started their pension pot five years earlier, they could have a pot in the region of £650,000 at 55. All thanks to the benefits of compound returns.
Ways to boost your retirement fund
Employer pension contributions can make workplace pensions an attractive option. The auto–enrolment rules mean all employers must now offer employees access to a pension. The employer pension contributions they make will, of course, enhance any contributions made by you (unless you opt-out, which is usually not a good idea).
Workplace pensions also offer tax advantages. Provided you contribute to the pension via the payroll, your contributions will be taken from your pre-tax salary, which means you’ll save all the income tax you would have paid on that money. This is commonly referred to as salary sacrifice.
You can also set up a personal pension alongside your workplace pension scheme. Benefits may include easier access to information about how your investments are performing, freedom to increase, decrease, or pause payments, and greater control in terms of how your money is invested.
The pension provider will usually claim the basic rate tax relief on your behalf and add it to your pension. So, if you contribute £100 to your pension, you will get £125 invested in your pot. If you’re a higher or additional-rate taxpayer, you can claim back any tax paid at the higher or additional rate via your annual personal tax return.
As long as your money stays in your pension, there will be no tax on growth or income, but there can be tax to pay once you take your money out when you’re over 55, rising to 57 in 2028.
Understanding risk
As with any investment, individuals investing into a pension scheme need to consider their attitude towards risk and the effect this will have on the performance of their overall investment pot.
The more risk you’re exposed to, the greater the potential returns tend to be, though past performance is not guide to future outcomes. You should be aware that a higher-risk approach to investing may also result in greater volatility, so the value of your investments could go up and down more sharply.
This can be less of an issue when a longer-term view is being taken, as is often the case when you’re considering your pension options, as there’s more time for investments to recover from dips in value.
As you get nearer to your retirement date, it’s a good idea to review your attitude to risk and make any adjustments to your portfolio. You’re getting closer to deciding how you take income from your pension, so your attitude to risk may start to change.
Keep track of your pots
Keeping a close eye on pension schemes that you are making contributions towards is essential, as is being aware of any pension pots that you may have stopped paying into, perhaps because you’ve changed job.
Consolidating old pension pots into a current scheme, or with one provider, could prove beneficial. For one, it can help you keep track of your future finances more easily by having all your pension pots in one place – one beautifully organised retirement fund to keep an eye on. You could also save on fees, which will be key if your plans to retire at 55 are to become a reality.
Before transferring pensions, beware of any exit penalties or transfer fees that might apply. It’s also worth remembering that some older pensions, especially final salary or defined benefit schemes, have valuable benefits that would be lost if transferred, so you may need to do some homework.
Pension freedom if you do retire at 55
Changes that came into force in April 2015 as part of the government’s sweeping pension freedoms reforms gave retirees much greater flexibility and control of long-term financial planning.
Instead of having to convert a retirement pension fund into an annuity that pays a guaranteed income, you can 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.
If it’s your goal to retire at 55, it’s not unachievable. The sooner you start putting money into a pension, the better position you’re likely to be in later in life – and the more chance you may have of enjoying that dream retirement lifestyle.
Those needing extra help, may also make use of our financial planning service to create a retirement plan that will help you reach your retirement goals. Book a free call to speak to the team to understand your options.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. Please note that during any transfer, your investments will be out of the market. If you are unsure if a pension is right for you, please seek financial advice.
Projections are never a perfect predictor of future performance and are intended as an aid to decision-making, not as a guarantee.
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