Updated: Jul 20, 2022
Last summer we told the story of a client whose ambition had always been to buy a camper van when he retired at 65 and enjoy himself on touring holidays. He spent his working life earning a modest, but by no means spectacular income, but over the years he regularly consulted us and we were able to guide him on pension decisions and, as a result, he was able to retire at the age of 56 and buy his camper.
Another client, Rob Whitehead, read the article and it inspired him to approach us to see if he could also afford to retire early. He was out of work and looking for a job, but wanted to know if retirement was an option.
Rob had first come to us about 18 months ago. He had a defined benefit pension scheme from his time working for a car manufacturer. We referred him to a third party for specialist advice which resulted in a transfer. At the time he joined us, he withdrew £200,000 from his pension tax free, which he used to pay off his mortgage and for house improvements. Now that he was no longer paying a monthly mortgage, this put him in a position where early retirement was starting to look viable.
Having discussed early retirement previously, we reviewed Rob’s situation, crunched the numbers and sent him an updated retirement plan report which showed that his income strategy in retirement was affordable. By reviewing his retirement provision, he knows he can enjoy an annual income of £30,000 until state pension age, recognising that he will need less money as he grows older. So we advised that his retirement plan was solid and that he could retire the following day if he wanted. As further reassurance, he had an asset in his home and the expectation of an inheritance which he could potentially fall back on.
At the moment Rob has a couple of interviews for jobs lined up and he’s going for these in a relaxed frame of mind knowing that work will be a matter of choice. He now knows that he is not drifting into retirement. This is the kind of flexibility that drawdown can give you.
We have another client, Simon Green who is 57 and doesn’t yet want to retire. However, some difficult personal issues mean that he needs to take a break to give them his full attention. This means he won’t have any earned income for a year, but his drawdown pension can be used to support him. He will draw from it his full personal tax allowance, which is £12,500, and he can supplement this with savings that will enable him to lead his normal lifestyle. He’ll return to work after taking this year out and continue with his retirement planning.
The biggest risk with a drawdown is that as soon as you take £1 out of your taxable pot it will trigger the money purchase annual allowance, which means that the maximum annual pension contribution on which you can get tax relief in future is £4,000 (gross). So, a high earner, who may want to contribute significant amounts in future, must take this into account. Drawing down before retirement should be reserved for special circumstances. As we pointed out in our March newsletter, a pension is not a bank account. Don’t be tempted to treat it as such.
However, as in Simon’s case, it can give you the flexibility to react to life-changing events.
The articles are for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action.
Names have been changed to protect identity.
No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.