I’ve been reading about the FIRE (Financial Independence, Retire Early) movement recently and the idea of retiring early is pretty appealing. What are the pros and cons? How easy is it to enjoy a decent standard of living if you retire at, say, 55?

Anonymous

Tom Selby, AJ Bell Head of Retirement Policy, says:

Stopping work as soon as possible remains a dream for many people. But if you aren’t super-wealthy, early retirement will usually require some serious saving while you’re young and an ultra-frugal
lifestyle – or a combination of the two.

In fact, analysis carried out by the Institute for Fiscal Studies (IFS) suggests whilst a larger chunk of the wealthiest in society are able to retire earlier compared to the start of the millennium, those with less wealth are generally more likely to work well into their 60s and beyond. Lower levels of financial security (for example, many people still have mortgages to pay off) and rises in the state pension age are among the possible reasons.

YOU NEED TO BE REALISTIC

That is not to say retiring in your 50s is impossible – you just need to be realistic about what is achievable and the long-term implications.

For starters, you usually cannot access your private pension before age 55, with this minimum access age set to rise to 57 in 2028. It is possible to retire before this age, but you’d need non-pension assets, such as ISAs or buy-to-let property, to support your lifestyle until you can access your retirement pot.

You also need to factor in the availability (or lack thereof) of the state pension. This is a valuable source of retirement income for millions of Brits but at the moment it only becomes available from your 66th birthday. The state pension age is then scheduled to rise to 67 by 2028 and 68 by 2046. The full state pension is worth just over £10,600 a year in 2023.

In terms of the pros and cons of early retirement, the obvious pro is that you will have more time to relax and do the things you enjoy doing. For lots of people, that single outcome is worth huge amounts of sacrifice. If you have paid off your mortgage and expect lower living costs when you stop working, early retirement will be more achievable.

But if you want to retire early and plan to travel, eat out at nice restaurants or generally have an active and potentially expensive lifestyle, you will need to build up a substantial pot of money to pay for it. Using tax-incentivised vehicles like pensions and ISAs will help with this. This will likely require you to sacrifice more on your lifestyle when you are younger. If you don’t do this, you’ll either need to cut your cloth significantly to make your retirement income plan sustainable, or risk running out of money too soon.

If you are eyeing early retirement, make sure you’ve sat down, ideally with a regulated adviser, and thought carefully about your spending plans and the impact retiring earlier will have on these plans.

THINK ABOUT SUSTAINABILITY

It’s worth remembering you might also miss out on tax-free investment growth if you start drawing an income from your pension early. In fact, by leaving your fund invested for longer, you have the potential to get the double boost of increasing the value of your pension through long-term growth as well as not depleting it through withdrawals. Take, for example, someone with a £300,000 pension pot at age 55. They have already taken their 25% tax-free cash and choose to start taking an income from their pot. If they keep their pension invested in ‘drawdown’ and enjoy 4% investment growth after charges each year, that pot could deliver an annual income of around £10,500 a year until their mid-90s (assuming the income rises each year by 2%, in line with the Bank of England’s inflation target).

If, however, they wait until around age 65 to access their pension and their fund grows by 4% per year over that intervening period, they could have a fund worth just shy of £450,000 to draw an income from. Assuming they still want their pot to last until their mid-90s, an annual income of around £18,500 a year (again rising each year by 2%) could now be sustainable (again, assuming investment returns are 4% per year after charges).

TAX AND LIFESTYLE CONSIDERATIONS

In addition, there are tax consequences that need to be considered when accessing your pension. Once you take taxable income flexibly from your retirement pot, your annual allowance – the maximum you can pay into a pension each year before being hit with a tax charge – will drop from £60,000 to £10,000, reducing your ability to make top-up contributions if your plans or circumstances change. Pensions are also extremely tax efficient on death, so if passing money onto loved ones is a priority it can often make sense to access your pension last of all your assets.

You should take a moment to consider the reality of early retirement too – because it isn’t just about the money. What do you plan to do with your time? Will you have enough going on to stimulate you? The ‘FIRE’ movement you mention in your question tends to advocate fairly extreme saving strategies which won’t be realistic or desirable for lots of people.

For many, taking on part-time work when transitioning towards retirement will be attractive as it allows you to remain active, earn an extra income but work fewer hours than previously. However,
this won’t be possible for everyone, particularly those who have physical jobs they might struggle to continue doing in their later years.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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