The pension pitfalls of retiring early

Retiring early is the dream for many people, but anyone thinking about stopping work at age 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 74 if they decide to retire at 55. That £15,000 also doesn't increase with inflation, meaning its spending power will decrease over time. 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 could last until age 84*. Anyone choosing instead to retire at the age of 65 could benefit from more investment growth and so their pot could 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 age 90, they would have to take £7,425 less from their pension each year in order to retire at the age of 55, compared to 65. Even retiring at the age of 60 would mean withdrawing £4,500 a year less.

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, meaning it would pay out an income of £8,450 a year if you took it at age 65 and wanted it to last until the age of 90. However, someone who still 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 66, whereas if they retired at 65 they could withdraw that £10,000 a year income until the age of 84.

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. For illustrative purposes only, returns not guaranteed.

Pot size - £200,000:

Pot size £91,000:

Retiring early is a luxury for most, but whatever your circumstance, you need to make sure you've considered all your options to feel good whilst enjoying your retirement. If you're unsure about your options, make sure you speak to a financial adviser.

We've got lots of information to help when considering your options, to get you started take a look at our guides for accessing your pension and drawdown.

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Keeping on top of all of your pensions can be difficult when they're all sitting in different places. See how much is sitting in your pension more easily by transferring them into an AJ Bell self-invested personal pension.

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Transfer your pension into a Which? Recommended Provider for SIPPs 2022, and take control of your pot.

What to check before transferring

You can easily transfer most types of UK pensions to us – even pensions you've already started taking an income from. But before you decide to transfer yours, it’s important you do the following:

• Get in touch with your current pension provider. Ask them to confirm your pension’s current value and check whether transferring means you’ll lose any guaranteed benefits or face penalties such as market value adjustments or reductions.

• Contact the government’s Pension Wise service for free and impartial guidance to help you understand what you can do with your pension pot.

• Consider talking to a suitably qualified financial adviser about whether transferring to a SIPP is right for you. Please note: to transfer a final salary (also known as 'defined benefit') pension worth £30,000 or more, a financial adviser must recommend that the transfer is in your interests. To confirm you’ve received the recommendation, you and your adviser need to complete our financial advice declaration form.

• If you’re in ill health, it's a good idea to seek financial advice. There may be an Inheritance Tax liability if you don’t survive the pension transfer by two years.

How to transfer

1. You'll need to open a SIPP with us if you don't have one already. This takes less than 10 minutes, and you can do it online.
2. During the application, you'll be asked to enter the details of the account(s) you want to transfer. We may also need you to post us some documentation.
3. Already have a SIPP with us? You can start the transfer process by logging in and from the 'My account' menu, choosing 'Transfers', then 'SIPP'.

That's it. We'll handle the rest of the admin from there and let you know when the transfer is complete.

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