Leaving your 9-to-5 job can be tempting, especially when you know that you have state pension and retirement benefits to fall back on. But while leaving the workforce might seem like the perfect way to escape the daily grind, it can be a big mistake if you haven’t prepared a solid retirement plan or are not financially ready to live only on your pension income.
In this article, we will go through everything you need to know about retirement and state pension and answer questions like:
When can men retire? What ages can you draw your private pension? What retirement benefits can retirees expect?
Full Retirement Age
The right time to retire should depend on your age and your current needs, and financial capability. You should be aware that there are three general retirement age groups.
Early Retirement: Below 65
On average, men retire at the age of 64, while women retire when they turn 62. Early retirement can grant people more time to travel, take up new hobbies, or find a part-time job that’s less stressful than the 9-to-5 grind.
However, the National Bureau of Economic Research found that only a few people have access to resources to support early retirement. While people become eligible for social security at age 62, the total monthly benefit doesn’t come until after a few years.
People who claim their retirement benefits at 62 would most likely only receive 75% of the total amount. One reason for this is because early retirees are granted checks for a more extended period.
Getting an early retirement would also affect the spouse, who would only be entitled to 35% of the total retirement benefits. In comparison, spouses are entitled to 50% of the retirement money if the individual retires at age 66.
For this reason, financial advisers recommend having a large nest egg to supplement an early retiree’s Social Security funds.
Normal Retirement: 66 to 70
Many are old enough to have built up a financial reserve to help support their life in retirement for this retirement age group. Choosing to have a normal retirement means you will get the full benefits, including Social Security.
Late Retirement: 70 and Older
Working for a few more years may be an appealing option for the older generation who are eager to stay active in society. However, retirement for individuals at this age is primarily for people who do not have enough financial resources to support themselves without other means of income.
Workers can claim full benefits of their Social Security when they reach their full retirement age. However, people who continue to work while receiving social security benefits will receive only 70% of their benefit amount instead of the complete 100%. Therefore, individuals should consult with a financial adviser before continuing to work to maximize their earnings during retirement.
There are many benefits that an individual can experience once they reach retirement age, some of which are offered by the state government.
A person who fails to claim their retirement benefits actively may be missing out on a lot of money.
Here are some of the benefits a retired individual could get in the UK.
The amount of state pension an individual may receive depends on the number of National Insurance contributions made throughout their working life and before they reached the full retirement age.
According to changes made in April 2016, the total amount of state pension is £179.60 weekly or £9,339 annually from 2021 to 2022.
However, the entire benefit amount is only given to those who paid at least 35 years’ worth of National Insurance contributions. To get any benefit amount from the state pension, an individual must have at least ten years of National Insurance contributions.
You can use this online calculator to determine how much state pension you will get once you retire. The calculator has been updated to follow the 2016 guidelines.
Pension credit is granted as a top-up for low-income retirees who depend on the state pension for financial support. Currently, the credit top-ups may amount to £177.10 for an individual and £270.30 for a couple.
People who wish to apply for this retirement benefit are advised to call the Pension Service on 0800-99-1234.
National Insurance cut
Once an individual reaches state pension age, they would no longer be required to pay National Insurance, regardless of whether they are still working.
This retirement benefit can give employed individuals up to a 12% cut in their annual tax bill. For self-employed individuals and those earning £9,569 to £50,270, this retirement benefit gives them up to a 9% cut.
Housing benefits are offered to people with less than £16,000 in their savings account, are low-income, or claiming certain benefits. This type of retirement support can give individuals up to 100% reduction on their housing expenditure, including rent and monthly loan repayments.
Winter Fuel Payment
Winter fuel payments are given to people who receive state pensions or other benefits from the government. As of 2021, each eligible household where the oldest person is under 80 may receive £200. Families with someone aged 80 or older are granted £300 in winter fuel payments.
Cold Weather Payment
Individuals can receive £25 payments for every seven days of frigid weather if they claim other income-related benefits, including pension credit, employment and support allowance, and jobseeker’s allowance.
The age a retired person qualifies for a free bus or travel pass varies depending on the area in the UK.
In Wales, Scotland, Northern Ireland and London, free travel passes are given to workers and individuals when they reach the age of 60. However, in the rest of England, this benefit is only available to workers and individuals of state pension age.
In general, 55 is thought of as the perfect retirement age at which people can access their private pensions in the UK. However, this figure is not set in stone, as the age at which you can retire on your private pension will vary as the UK state pension ages change.
The misunderstanding comes from the fact that until recently, the state pension age for men in the UK was 65, and one can only access private pension ten years before retirement. But, as most of us are aware, the state pension age has changed. As of October 2020, the official state pension age for both men and women will be 66, increasing to 67 between 2026 and 2028. If you’re unclear about when you will officially reach the state pension age, you can find a timetable on the government’s website here.
In 2014 the UK government announced new pensions freedoms in a document called Freedom and choice in pensions. The document states that ‘The Government will increase the minimum age at which people can access their private pension under the new tax rules from 55 to 57 in 2028.’
That means that those 45 or younger cannot access their private pensions until they reach 57 – ten years before they reach state pension age. Compared to those turning 66 later this year who will be able to access their private pensions 11 years before pension age. According to former Pensions Minister Steve Webb, it is likely that when the state pension age increases to 68, the access age for private pensions will also rise to maintain this 10-year difference.
It should be noted that there is no legislation to make this official, so there is every chance that officials can make further changes. For example, they could either raise or reduce the age to access your private pension. Of course, the latter has the double advantage of being a potential vote winner and tax generator to the government. Still, the safest bet when you are planning your future finances is to make no assumptions.
Many people dream of retiring early. It is undoubtedly attainable for many but requires some serious financial planning, given that your pension pot will probably need to sustain you for decades. According to the Office for National Statistics, the average life expectancy in the UK for a 55-year-old man is 84 compared to 87 for a woman, but you may be one of the lucky ones who lives much longer. A 55-year-old woman has a 25% chance of reaching 94, which, if retiring at 55, means stretching a pension pot over nearly 40 years!
So what are your options if you are currently under 45 and want to retire before the age of 58?
If you live in the UK, an ISA is possibly the best option. However, if you are a UK expat living abroad, you will need to make personal tax-efficient investments and savings in a structure suited to your jurisdiction.
It is worth taking some time to get this right. I suggest it is best done in collaboration with a financial adviser who understands the tax implications relevant to you, depending on your country of residence.
I help expats in many jurisdictions find the right products for them and work out exactly how much they need to save to make their early retirement dreams come true. If you’d like to discuss your retirement planning, please do get in touch at email@example.com.
Senior Financial Consultant- Highly Commended Emerging Talent of The Year (International Investment Awards 2019)
I aim to maintain and grow an excellent relationship with each client which lasts throughout their working lives and beyond. I strongly believe that a good financial adviser can make a significant difference to an individual’s financial success and positively impact their lives, which is why I love doing what I do.