Will your pension be big enough for you to retire at 55?

Lisa Caplan


5 min read

Waving goodbye to the 9-5 grind to retire at 55 may seem like a pipe dream to many, but early retirement is achievable – and it’s not reliant on picking Saturday’s winning lottery numbers. Starting early and investing regularly in a way that’s right for you could help you get there.

retire-at-55

People’s expectations about their retirement age have changed considerably in recent years. Changes to the state pension and the impact of an increasing life expectancy have had a big effect.

By October 2020, the state pension age for men and women will increase to 66, and younger people will have to wait even longer before they can retire. Current law will bring the state pension age up to 68 between 2044 and 2046, with proposals that could mean it goes up even sooner.

Further to this, the number of years you have to make National Insurance contributions to qualify for a full state pension has increased from 30 to 35.

Given these rule changes to the state pension and today’s 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.

What’s more, the pension reforms that came into effect in April 2015 now give people much more flexibility about how they take money from their pensions once they hit 55. This means 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 do you need to save to retire at 55?

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 retirement.

According to research conducted by Which?, you’d need an annual household income of about £26,000 to have a comfortable retirement1. This covers all basic areas of expenditure and some luxuries such as European holidays, hobbies and eating out.

To provide this level of guaranteed annual income, you’d need a pension pot of just over £1.2m that keeps up with inflation2. (This is based on an annuity quote from the Money Advice service, using the whole pot to buy an annuity). This pot size is larger than the current lifetime allowance.

A more luxurious retirement, including buying a new car every five years and taking long-haul holidays, would require an annual household income of £39,000, which means a pension pot of more than £1.8m3!

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 with Nutmeg in our highest risk portfolio, assuming 20% tax relief at source, could build a retirement pot of around £413,000 by the time they’re 55. If they’d started their pension pot five years earlier, they could have a pot in the region of £596,000 at 55 (in both cases, we’re assuming returns remain steady)4. All thanks to the benefits of compound returns.

Ways to boost your retirement fund

Employer contributions can make workplace pensions an attractive option. The auto enrolment rules mean all employers must now offer employees access to a pension. The 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 reclaim the basic rate of tax on your behalf and add it to your pension. This is equivalent to a 25% top up. So, if you contribute £100 to your pension, you will get £125 invested in your pot. If you’re a higher-rate taxpayer, you can claim back any tax paid at the higher 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.

Understanding risk

As with any investment, individuals saving 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. 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. It’s important to ensure you don’t have money sitting in a poor-performing pension or one that’s suffering from high annual charges, or else it could damage your returns and impact your target retirement age.

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. 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 old pensions, especially final salary schemes, have valuable benefits that would be lost if transferred, so you may need to do some homework.

New pension rules mean greater freedom if you do retire at 55

Changes that came into force in April 2015 as part of the government’s sweeping pension reforms now give you much greater flexibility and control of your long-term financial planning.

Instead of having to convert a 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 draw down income as and when you require to minimise the amount of tax you pay.

Remember, there’s also the State Pension to consider. If you were born after 5th March 1961, you’ll be eligible for the State Pension when you’re 67. It all depends on your birth date, so you should make sure you check yours. You need 35 years of National Insurance contributions to qualify for the full State Pension, which works out to £8,546.20 per year (£164.35 per week5).

Don’t stop dreaming

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.

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. Pension rules apply and tax rules may change in future. If you need help with pensions, 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.

Sources

  1. Which? expenditure figures based on a survey of 6,000 retired or semi-retired couples who are Which? members
  2. It’s assumed that the total pension pot is traded in for an annuity at a rate of 2.137%, which is based on a quote from the Money Advice Service for a 55-year-old.
  3. Which? expenditure figures based on a survey of 6,000 retired or semi-retired couples who are Which? members
  4. Nutmeg projection data, August 2018
  5. Gov.uk, Working, jobs and pensions, The new State Pension – what you’ll get
Lisa Caplan

Lisa Caplan

Lisa Caplan is head of financial advice at Nutmeg. She combines her wide experience of developing brands for blue chip companies with eight years as a chartered financial planner delivering financial advice to a range of people at different stages of their lives.


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