Early retirement
Speeding up the retirement process

Retiring successfully in our fifties is the ultimate goal for many of us. But as the saying goes, ‘Most people don’t plan to fail, but they do fail to plan.’ The reality is that many individuals will not achieve this goal unless they take some decisive action.

Households are on track to receive just 76 per cent of their hoped-for retirement income, according to figures from the Fidelity Retirement Expectation Index.

So what are some of the less well publicised strategies that individuals may wish to consider that could enable them to speed up the retirement process?

Double money
A company bonus payment up to 100 per cent of an individual ’s earnings (subject to a maximum of £225,000) could be put straight into a pension. Higher bonus earners could potentially put away more than double the maximum if they were selective about exactly which day they made their payments. The pension rules allow individuals to choose their own ‘year end’ for pension contributions.

Under ‘bonus sacrifice’ they could take a quarter of this sum as tax-free cash as soon as they reached the age of 50 (55 from April 2010). In this tax year, there is a current lifetime limit of £1.6m on the total value of a pension fund.

Keep it in the family
Anybody earning at least £4,524 in this 2007/08 tax year is treated for state second pension (S2P) purposes as if they earned £13,000, enhancing their state pension at retirement.

A spouse employed in a business, or on a freelance arrangement to assist with work, could be paid at least £4,524 a year. They will then be entitled to an S2P on the basis of earning £13,000, not just £4,524. On retirement, those earning £4,524 throughout their working lives would be entitled to S2P payments of £3,390 a year. You cannot claim S2P benefits until you reach the state retirement age.

A sigh of relief
Individuals could build up a bigger fund using a pension than with alternative savings because the government offers tax relief on all contributions – 22p is currently paid for every 78p invested (this will reduce to 20p with effect from 6 April 2008), taking the total contribution to £1. Higher-rate taxpayers may get a further 18p through their tax return. At retirement, a tax-free lump sum of up to 25 per cent can also be taken tax-free.

Individual Savings Accounts (ISAs) are a tax-efficient method of topping up retirement savings. Everyone has an annual ISA allowance of £7,000 in the current tax year, and any income drawn is tax free, unlike pension income, which is taxed.

Keep your options open
The purchase of an annuity from a pension company using a pension fund provides an income for life. It is crucial to take professional advice when looking to purchase an annuity, as it could mean that you receive extra income every year by shopping around for a better annuity rate.

You should be able to exercise this ‘open market option’ whether you are in a personal pension scheme or some company schemes. Operating an open market option at retirement is now a requirement for UK schemes, although some company scheme members still automatically purchase annuities from their scheme’s own provider, which may not be the most financially prudent option.
Need more information? Please email or contact us with your enquiry.

Levels and bases of, and reliefs from, taxation are subject to change.