The pension pitfalls of retiring early

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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Retiring early is the dream for many people, but anyone thinking about throwing in the towel at 55 needs to properly consider the impact it’s going to have on their pension and on the lifestyle they can afford during retirement before they hand in their notice. Retiring even five years earlier can have a dramatic impact on how long your pension pot lasts, meaning that you’ll either need to find money from elsewhere to fund the rest of your retirement or significantly change the amount of money you take from your pension each year.

Someone with a £200,000 pension pot who takes a £15,000 income from it will find their pot only lasts to the age of 75 if they decide to retire at 55. However, if they held off retiring for five years and left their pot to grow during that time (but didn’t add anything more to it) it would last until 84*. Anyone choosing instead to retire at the age of 65 would benefit from more investment growth and so their pot would last until they turn 100 – 25 years longer than retiring at 55 and far beyond the average life expectancy of someone that age.

If instead someone decided to retire early but change the amount of income they take from their pension so that it lasts until they’re 90, they would have to take a £7,250 annual pay cut in order to retire at the age of 55, compared to 65. Even retiring at the age of 60 would mean a £4,500 annual pay cut. “The issue of your pot running out is more stark with smaller pension sizes. The average pension pot in the UK is £91,000, according to industry group TISA, and someone who wants it to last until the age of 90 would have to take a 40% pay cut in order to retire at 55, rather than 65. If instead they chose to take a £10,000 income from it, by retiring at age 55 it would only just last long enough for them to get to state pension age, running out at age 67.

For many the appeal of retiring earlier is that you’re younger and therefore able to enjoy doing more, such as travelling, socialising or hobbies. However, these come with a price tag and you could find that funding a more active life coupled with retiring early means you leave yourself with very little to live on when you’re older. That’s not to say it can’t be done, but people need to either plan ahead and funnel more into their pension or be realistic about how much income they can take from the pot each year.

*Assumes 4% investment growth post charges each year.

Pot size - £200,000:

Taking the same income - £15,000 Varying the income
Age you start taking an income What age does it run out? Age you start taking an income Income
55 75 55 £10,750
60 84 60 £13,500
65 100 65 £18,000
Source: AJ Bell. Figures assume 4% investment growth post charges each year and are based on a £200,000 pot at age 55, taking a £15,000 a year income via drawdown starting at 55, 60 and 65. Source: AJ Bell. Figures assume 4% investment growth post charges each year and are based on a £200,000 pot at age 55 and making the pot last until age 90 via drawdown.

Pot size £91,000:

Taking the same income - £10,000 Varying the income
Age you start taking an income What age does it run out? Age you start taking an income Income
55 67 55 £4,900
60 74 60 £6,100
65 83 65 £8,200
Source: AJ Bell. Figures assume 4% investment growth post charges each year and are based on a £91,000 pot at age 55, taking a £10,000 a year income via drawdown starting at 55, 60 and 65. Source: AJ Bell. Figures assume 4% investment growth post charges each year and are based on a £91,000 pot at age 55 and making the pot last until age 90 via drawdown.

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These articles are for information purposes only and are not a personal recommendation or advice. Tax treatment depends on your individual circumstances and rules may change. Pension rules apply.


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Written by:
Laura Suter

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.