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Taking early retirement: what you need to know

Retiring early may affect your state pension entitlement.

Although research shows that, surprisingly, most people are actually quite happy in their jobs that doesn’t mean that given half a chance many of us wouldn’t take an early retirement. But leaving work before ‘official’ retirement age isn’t as simple as packing up your desk and heading for the golf course.

When considering early retirement the first thing that will come to mind is the effect on your finances. Obviously the government isn’t going to roll over and give you a couple of extra years’ state pension, so what are you entitled to and how can you make the most of your money when you’re no longer supported by a full-time wage?

As things stand men are entitled to draw state pension at 65, women at 60.  However, between 2010 and 2020 women will reach pensionable age at 65 until 2024 when both men and women will need to reach 68 before drawing a state pension. Likewise, the earliest one is entitled to draw a company or personal pension is 50, rising to 55 in 2010. Serious illness with a life expectancy of less than a year is the only situation in which your pension can be drawn early – 100% in a lump sum for a single person, 50% for those married.

Retiring early may also affect your state pension entitlement. Why? Simply because while working you’re building up entitlement through paying money to the taxman. So what can you do to ensure you get the maximum from your retirement fund without spending any longer than you have to behind a desk? If you’re under 60, voluntary National Insurance contributions can be made while part time or casual workers can also add to their NIC record. Likewise men aged between 60 and 65 may be entitled to contribution credits. Speak to your local tax office to get good advice on how to make the most of your state pension. Personal or company pensions will also be affected by early entitlements – you will have saved less money which needs to fund you, in theory, for a longer time.  In addition, final salary schemes, based on how many years you have worked, will be less too. Pension schemes differ and indeed some may make allowances for retirements due to ill health or redundancy, so be sure to check your policies carefully.

To be sure to get the most from early retirement trace entitlements from past jobs which you may have forgotten about, where possible buy additional years from a final salary scheme, increase your contributions to existing pension schemes and use tax-friendly savings such as ISAs to boost your income and give you the lucrative and relaxing retirement you’ve always dreamed of.

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