09 Jul 2024

4 steps to help you retire early

Boosting your contributions could increase your pot by almost £20,000

Most people wait until they reach state pension age to retire, but what if you could retire three years earlier?

According to pension provider Standard Life, increasing your private pension contributions by just 2% could give you the option of retiring at age 63.

Here, Which? reveals how much extra you could earn by increasing your contributions and the four steps you can take to retire early.

1. Boost your contributions by 2%

According to Standard Life, boosting your contributions by 2% over the course of your career could boost your retirement pot by almost £20,000.

This is because pensions are tax efficient and over a number of years allow for the potential of compound investment growth which means even a small amount can have a large impact in future.

For example, a full-time worker aged 22 on £25,000 paying the minimum auto-enrolment contribution of 8% (5% paid by the employee and 3% put in by the employer) could earn £434,000 at the age of 66.

However, by boosting employee contributions to 7%, they could amass a larger fund value (£453,000) by age 63 - gaining £19,000 and the option to retire three years earlier.

The table below shows at what age you could retire by increasing your contributions and how much you would retire with.

Contributions	Retirement age	Amount in pot	How much extra you can earn
3% employer, 5% employee	66	£434,000	n/a
3% employer, 6% employee	65	£460,000	£26,000
3% employer, 7% employee	63	£453,000	£19,000
3% employer, 8% employee	61	£440,000	£6,000
3% employer, 9% employee	60	£451,000	£17,000
3% employer, 10% employee	59	£459,000	£25,000

Source: Standard Life. Assuming 3.50% salary growth per year and 5% a year investment growth. Figures are not reduced to take effect of inflation. Annual Management Charge of 1% assumed. The figures are an illustration and are not guaranteed. Earning limits are not applied.

However, Standard Life said the trade-off of contributing more and retiring earlier comes with its own challenges, as you’ll need to make your retirement pots last longer and spread your savings over more years.

If you want to maintain a higher income in retirement, increasing your contributions by 2% over the course of your career could generate a pension pot of £542,000 - £108,000 more based on the standard contributions.

The following table shows how much extra you could earn by increasing your contributions and retiring at 66.

Contributions	Amount in pot age 66	Difference
3% employer, 5% employee	£434,000	n/a
3% employer, 6% employee	£488,000	£54,000
3% employer, 7% employee	£542,000	£108,000
3% employer, 8% employee	£597,000	£163,000
3% employer, 9% employee	£651,000	£217,000
3% employer, 10% employee	£705,000	£271,000

It’s worth noting that Standard Life said the pot sizes above shouldn't be seen as ‘ideal’ as savings targets should take numerous factors into account, including your retirement standard of living (more on that below).

Find out more: how to plan for retirement

2. Check your pension rules

Whatever age you decide to retire, you won’t be able to access your workplace pension until you’re 55 years old (changing to 57 by 2028).

There may be a few occasions when you can take it earlier, including:

you’re retiring early because of ill health
your life expectancy is less than a year
you had the right under the scheme you joined before 6 April 2006 to take your pension before you’re 55 – ask your pension provider if you’re not sure

Some companies offer to help you get money out of your pension before you’re 55.

However, this could be an unauthorised payment - meaning it's a payment made outside of the government’s tax rules. If it’s unauthorised, you’ll pay up to 55% tax on it.

Your state pension won't be available until you reach state pension age – currently 66 (rising to 67 between 2026-2028 and 68 between 2044-2056).

Find out more: when can I retire?

3. Work out how much you need to retire

Every year, Which? analyses thousands of pensioners' spending habits to create three ‘income targets’ for retirement. You can use this to work out what type of lifestyle you wish to have in retirement and how much you’ll need to fund it.

Income target	What it covers	Amount for a one-person household	Amount for a two-person household
Essential	Essentials like food, drink, housing, transport & utilities	£13,000	£19,000
Comfortable	The above plus regular short-haul holidays, recreation, leisure, alcohol, tobacco, gifts to family and friends, and charitable donations	£20,000	£28,000
Luxury	The above plus extended or long-haul holidays, health club memberships, home improvements, private healthcare and a new car every five years	£32,000	£44,000

Find out more: how much you need to retire

4. Consider financial advice and guidance

People are increasingly seeking out advice to help them make their general retirement decisions following the introduction of the pension freedoms in 2015.

If you need help in choosing a pension, or reviewing your retirement options, an independent financial adviser (IFA) may be able to help.

IFAs are authorised to give you advice and recommend suitable pension products and investment options. Many advisers will offer ongoing reviews to ensure that your finances stay on track throughout your retirement.

If you're looking for more general information - sometimes called 'guidance' without recommendations or 'personalised guidance', there are a few options - particularly if you are planning your retirement.

Pension Wise - allows you to speak to someone over the phone or face to face to understand your pension options.
The Money Helper service - a service set up by the government to offer impartial money guidance on all financial areas.
Which? - we have a range of free pensions guides – how to plan your retirement is a good one to start with.

Find out more: how to get pension and retirement advice