As you will know, both the health and economic consequences of coronavirus have been severe. As well as more than 50,000 people in the UK succumbing to the virus, many millions of households have been affected economically whether on furlough or, even worse, because an earner has lost their job.
The Office for National Statistics has reported that a record 314,000 people lost their job in the three months to September, pushing up the UK unemployment rate from 4.1% to 4.8% between the second and third quarters of 2020.
While many people have been forced to accept redundancy, perhaps you’re in a different position? If you have enjoyed being at home over the past few months, maybe you feel that, if you were to be offered redundancy, that now might be a good time to consider early retirement?
A one-off redundancy payment can be an opportunity to change or accelerate your retirement plans. And while early retirement may have long been a dream, it can be daunting when it happens unexpectedly.
If you are considering taking early retirement, or you’re facing redundancy, here are some useful tips.
1. Don’t panic
Choosing when to retire is one of life’s biggest decisions. It can be stressful, particularly if the opportunity for early retirement has come out of the blue, or you’ve changed your plans.
The first step is to take stock and not to make a rash decision. We find that we can add value to clients in this position, as we can help you to answer some of the most important questions that you will have at this time, such as:
- Will I have enough to live on?
- Will my savings last me through my retirement?
- How can I make the most of my redundancy payment? (more of this later)
- How can I minimise the tax I pay?
- Can I still support my family – for example, by making gifts to children that I had planned?
2. Think about what you want to do next
We meet many clients who are so concerned with the finances of their retirement that they don’t give much thought to what they want to do in their later years.
Redundancy and early retirement often mean an unexpected and significant change to your life and future plans. So, it’s important to think about what you might want to do next.
- How will you spend your time?
- Do you want to keep on working? Maybe you’d like to work part-time, on a consultancy basis, or set up your own business?
- What plans do you have for your retirement?
- What’s on your bucket list?
3. Work out how much you’ll need in retirement, and whether you have enough
If you’re considering redundancy and early retirement, it’s a good idea to work out what your cost of living will be.
- Consider your current outgoings and any planned future outgoings
- Subtract any expenses you expect to no longer have (costs of commuting etc.)
- Think about any expenses you can cut back on
- Add in any new expenses (e.g. travel plans)
Again, we can work with you to calculate how much money you’re likely to need for the whole of your retirement. We can use cashflow modelling tools to forecast your likely expenditure into the future and work out how much you’ll need to live the life you want.
4. Work out if you have ‘enough’
If you’re thinking of retiring early, it’s important to establish whether you have ‘enough’ to pay for the retirement that you want.
You’re likely to have pension savings built up over your career. This could include Defined Benefit (Final Salary) pensions, workplace pensions through your employer, or private pensions you’ve contributed to yourself.
Obtain values for all these schemes and speak to us to determine what income they are likely to provide. You can normally access these pension savings from age 55 (57 from the year 2028).
You will probably also have an entitlement to the State Pension, which you can claim from age 66 (or age 67 if you retire between 2026 and 2028).
You may also have other forms of income from other sources, such as property, investments such as ISAs or perhaps even a substantial redundancy payment.
We can help you to establish what your assets are worth and what income they could provide. Crucially, we can also give you advice on how you should draw your income. For example, it could be beneficial to draw income from investments in the early years and to leave your pensions invested.
5. Make the most of your redundancy payment
If you have been made redundant, or you have decided to take early retirement, you may have received a redundancy package. Redundancy pay qualifies for special tax treatment, with the first £30,000 payable tax-free.
If you receive a payment of more than £30,000 or in lieu of notice, this would typically be subject to tax at your marginal rate. You may be able to avoid paying tax on this amount by paying it into your pension instead (subject to pension contribution allowances).
For example, if you are a member of your employer’s pension scheme, you could ask your employer to pay any amount above £30,000 directly into your pension. The boost to your pension fund could be worth nearly double the net amount you’d get if you took the bonus as cash.
Paying some of your redundancy settlement into your pension will also give you more tax-efficient planning options for the future, as well as a perfectly timed boost to your pension pot just before you head into retirement.
Get in touch
If you are thinking about retiring early, or you’re facing redundancy and would like the reassurance of knowing where you stand, please get in touch. Contact us by email at email@example.com or call us on 01189 876655.