How to maximise your pension to retire at 55

Life used to begin at 40, but now that so many of us in the UK are living longer, healthier lives, maybe life really begins at 50. If that’s the case, you might be wondering if retiring at 55 is achievable. And for that you’re going to have to build a pension pot that will last for a further 30 or 40 years.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
Saving for a pension

It may seem daunting taking a pension at 55. With the state pension age set to rise to 66 by 2020 due to rising longevity, you need to take charge of your own pension provision if you want to retire in your 50s with a decent pot. Starting early and investing well can give you a fighting chance, and here’s how to do it.

Retiring at 55 begins with asking the right questions

You’ll need to work backwards and ask yourself (and ideally your financial adviser) ‘how much pension do I need to retire at 55?’. What a good pension pot looks like will depend on your current and expected salary, whether you will be mortgage free or not, and the kind of lifestyle you want in retirement.

Research from Prudential found that people retiring this year can expect an average retirement income of £21,850 if they are a man and £16,900 if they are a woman. But consumer group Which? estimates you need an income of about £26,000 a year to enjoy a comfortable retirement, and £39,000 a year for a luxurious one including things like a new car and long haul holidays. This equates to a pot of £1.3 million to £2 million in size, and most of us will fall short. To get there, you may need to make sacrifices today in order to save a decent proportion of your earnings.  

Work out how much you need to save to retire at 55 in comfort.

Start saving early

Starting to save into a pension early is vital because it gives your money as much time as possible to grow, so you can benefit from the power of compounding – essentially, earning interest on your interest. 

Here’s an example from Fidelity Investments to illustrate how starting to save in your 20s can pay big dividends: David starts investing £100 a month at the age of 25, while Mike invests £200 a month at age 45, so they both save £48,000 by retirement. Assuming a 5% annual return, the effect of compounding means David’s pot has more time to grow, so he ends up with almost twice as much as Mike - £153,328 compared to Mike’s £82,549. If David invested well and made more than 5% a year on average, and he kept his fund charges low, he could ramp up his pot even faster. 

Make the most of employer contributions and tax breaks

Under auto—enrolment rules, all employers now have to pay into workplace pension schemes when their staff are also paying in. Currently, employers must pay in at least 2% where staff are putting in 3% of their salary, but this will increase next tax year to 3% where workers are paying in 5%. This is free money from your employer, so make the most of it and ensure you do not opt out of auto—enrolment.

If you are self—employed and run your own company, you can set up your own pension scheme, or you can simply pay into a self-invested personal pension (SIPP) or Lifetime ISA. Remember that pension savings are tax efficient because you get tax relief on contributions, worth an extra 20% on top of whatever you pay in if you are a basic rate tax payer. Take advantage of this and put aside as much as you can. If you pay in to a workplace pension through the payroll, known as salary sacrifice, contributions are taken from your pre—tax salary, which means you also pay less income tax.

Read more: What is a SIPP?

Consider paying a professional to help you retire at 55

Once you’ve invested in a pension, your portfolio will need careful monitoring to make sure it remains suitable for your life stage, attitude to risk, and the current market and economic environment. You will also need to make sure the charges you are paying are still competitive. Nothing erodes your returns more insidiously than excessive fees and charges, and this can affect the age at which you can retire if it destroys the value of your pot. 

It may be worth paying a professional financial advisor to help you with this. They can also make sure you are taking advantage of all the tax allowances for which you are eligible, and design a strategy to make your money last longer once you are in retirement.

Research from Unbiased found that the cost of advice paid for itself over time in higher returns from better long—term investing — it says taking advice from the age of 35 could add more than £25,000 extra to a pension pot, giving a return of 4336% on the initial cost of advice (calculated as £580 to advise on a £200 a month pension contribution). Good advice could prove a wise investment to help you live the dream of early retirement and secure a financially comfortable future.

Take control of your pension with a SIPP

SIPPs, a type of pension available to UK residents, grants you greater freedom when investing and more control over your own pension. You can invest in stocks, fixed—income products, exchange traded funds (ETFs) and units trusts, commercial property and commodities like gold in your SIPP. They’re very easy to set up, and some providers offer SIPPs where you select from risk—based portfolios or fund choices.

You can read more about pensions and SIPPs here.

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