How to retire earlier: workplace pensions, SIPPs and Government help

Want to spend less time working and more time living? Here are our top tips for securing the dream of an early retirement.

Retiring early

We'd all like to be able to retire at an age when we can enjoy that free time.

But is it still possible to retire in your 50s?

If you want to retire early, you’ll need to ensure you have enough money to live on for the rest of your life, before you stop working.

This means building up a decent amount of savings to generate an income to live on.

Here are some tips to help you on your way.

Don’t rely on the State Pension

The State Pension is only paid out when you hit the State Pension age which means you will have to wait until your mid-60s to get access to it.

You can check what your State Pension age will be here.

However, you can access pension savings in a workplace pension or personal scheme at the age of 55, through pension freedoms, so if you want to retire early this is where you should focus your attention.

That said, to boost the money you get in retirement you should make sure you will get the full State Pension, which is currently just over £220 a week and requires 35 years of contributions.

Take a look at How to get a State Pension forecast and The State Pension explained to see where you stand.

Start saving young

The best time to start saving for a pension is obviously when you’re young, especially if you have hopes of retiring early.

That’s because whatever you save will benefit from the effects of compound interest and have more time to grow into something substantial by the time you are ready to stop working.

That said in your 20s and 30s you will have other financial priorities like saving for a house rather than locking into a pension you won’t see the benefit from for decades. But putting away anything you can will help you in the long run.

Pensions specialist Royal London has put together a guide on exactly how much you need to save at different ages.

For £300,000 – a comfortable but not spectacular retirement based on a £27,000 annual income – a typical worker would need to save 16% of their income if they started in your 20s.

Delay saving until your 30s and that figure shoots up to 23%.

Of course, to retire early you'll need to save considerably more than those figures.

Join your workplace pension scheme

All employers have to offer a workplace pension to almost all workers.

The auto enrolment scheme means you pay in at least 5% of your salary and your employer must top that up by at least an extra 3%, taking total contributions to 8%.

While still a tough ask, shaving a few years off your retirement age suddenly seems a little more attainable, when you consider this extra help.

You are able to opt out of a workplace pension scheme, but if you do you will be giving up what is essentially free money from your employer and the Government.

Start a personal pension

If you don’t have access to a workplace pension scheme yet or, if you want to go the extra mile, start a personal pension.

You will get tax relief on the contributions you make, which go into an investment fund. 

If you fancy really taking control of your pension planning, you might want to consider a Self-Invested Personal Pension (SIPP), which allows you to decide exactly where your cash is invested.

You can learn more about how they work in our guide to taking control of your own pensions.

Increase your contributions

It's not rocket science but, to boost your pension savings, whether in a workplace pension or personal pension, you should contribute more when times are good.

Have a look at this workplace pension contributions calculator or the Hargreaves Lansdown pension calculator to see what impact adjusting your contributions will have to your savings.

Engage with your savings

Of course, in order to reach early retirement, it’s not enough to put that money in your pension and hope that it performs well – in order to get the most out of your pension contributions, you really need to engage with your pension.

You should regularly – but not too regularly – look at how your fund is performing, and if it’s not up to scratch, don’t be afraid to move it elsewhere!

Keep an eye on pension fund fees

Millions of workers could be delaying the age they retire thanks to high pension management fees, according to research from Profile Financial.

It found that over £2 billion is being wasted every year through excessively high charges which on average are 1.47% for 35 and 45-year-olds or 1.85% for over 55s.

The average 45-year-old has £32,768 stashed in their pension pot and pay fees of around 1.47%. Should they want to grow this to £50,000 they would need to work until they were 87.

But they could shave 22 years off that by moving to a fund levying a smaller 0.34% fee and save a pot worth the same amount by the age of 65.

The figures highlight how much of an impact fees have on pension savings and how it is crucial to check what you are being charged.

Keep track of all your pots

You might have a pension scheme through your employer and others from previous employers.

Ask the pension scheme administrators for benefits statements, so that you can get a projection of the annual retirement income you'll get from your pensions.

If you don't know what pensions you've got, or can't find them, use the Pension Tracing Service. If that fails, contact your old employers and consider using an unclaimed assets register (more on this here).

Once you find them, you should automatically consolidate all your pensions. That might work for a lot of people but it certainly isn't for everyone.

Invest in retirement – and access your funds gradually

If you're going to retire early, there's every chance you're planning to keep investing after packing it in to keep your pot topped up.

Obviously investing when you're no longer bringing in a normal salary brings its own challenges, which we run through in this detailed guide to investing in retirement.

Think about how you access your funds

Actually putting the money aside to build up a pension pot is not the whole battle though – the decision you make once you reach retirement can make or break your financial future.

The new pension freedoms mean you can do what you want with your pension savings once you hit the age of 55.

You can choose to take a tax-free lump sum and keep the money invested, withdraw the rest (subject to tax) or buy an annuity. Read an expert's advice on the most tax-efficient way to withdraw your pension here.

Want an annuity?

It's definitely not for everyone, but you could consider buying an annuity that will generate an income for the rest of your life.

If you do go this route, it’s important to shop around for an annuity as the rates can vary greatly.

The worst thing you can possibly do is just accept the quote from the insurer you’ve been saving with – make use of the Open Market Option, and shop around for the best possible deal.

We've put together a straightforward guide to buying an annuity here.

Watch out for those debts

Still having debts to repay when you give up your main source of income is obviously not ideal, so it's worth focusing on clearing your mortgage, any loans or credit card debt before retiring.

That said, it needn't be the end of the world as it is possible to whittle away the remainder of your debts in retirement, as we explain here.

Don’t put all your eggs in one basket

Pensions are an important part of your retirement savings plan but don’t forget to build on this with a range of other savings and investment vehicles, like ISAs and property.

Assuming you qualify, the Lifetime ISA is a good option as not only is it tax-free, but the Government will actually give you a bonus on what you save – up to £1,000 a year.

The important thing to note is that any withdrawals before age 60 will incur a 25% penalty charge unless you use it for buying a home or another huge life event (like a wedding).

So you should either keep this aside until your 60s or use it as a tool to slash the time it takes to pay for your home.

Remember, you can only get one before you're 40 and can only save £4,000 a year, so you may need to combine it with other ISAs.