One of the things that gets me through winter each year is looking at seed catalogues. Pictures of plump tomatoes, shiny apples and bright carrots offer a flavour of summer.
I know some wealthy people who do their jobs well beyond their 70s because they love it. But I also meet many people in their 50s and 60s who are fed up with work — whether bored by it or ground down by stress. One approach I find helpful is to persuade them to create a serious plan for a fun early retirement. It is to dreary working life what seed catalogues are to bleak winters.
Today, most people over 45 will have to wait till they are 67 to reach the official state pension age. Anyone younger will have to wait till they are 68. Many who have retirement funding in place from 67 or 68 would like to retire sooner. They just need to fund their living expenses in those years.
Work out what you want to do and what it will cost. If you are a couple, you’ll want to find a plan that excites you both. Then comes the challenge of saving. Could investing this year’s pay rise be the solution?
In February CPIH inflation — a measure that includes homeowners’ costs — hit an annual 5.5 per cent in the UK. Figures released on Tuesday by the Office for National Statistics show that the year on year growth in average weekly total pay, including bonuses, was 5.4 per cent at the end of February.
It is unlikely that wages will continue to track inflation as the energy crisis bites but if you are getting a good pay rise and have the wherewithal to cope with rising prices you might consider putting the salary increase into your pension via salary sacrifice to fund your early retirement.
Assuming a return of 3 per cent above inflation — a modest aspiration over the long term historically — any one-off sum you put away today will be worth more than twice as much in real terms in 30 years. Unless you are putting away a big amount — like a generous bonus — this is unlikely to be enough.
But what if you found that you could carry on saving this year’s rise every year into your pension, on top of your normal contributions? In the first table we see the impact of disciplined saving.
If you choose to contribute by salary sacrifice, the money goes into your pension pot untouched by income tax or national insurance (NI) contributions.
Salary sacrifice is particularly beneficial for those whose pay rise will tip them over the £100,000 wage boundary. For every £2 you earn over £100,000 you lose £1 of your tax-free personal allowance. It means earnings between £100,000 and £125,140 this year will be taxed at the equivalent of 60 per cent — and 63.25 per cent if you count NI and the Health and Social Care Levy. If you are paying off a student loan, the marginal rate on these earnings could be as high as 72.25 per cent.
While salary sacrificing into a pension is the ideal option for most people, those whose pensions are approaching the lifetime allowance of £1,073,100 may need to think carefully about their strategy and take advice. The same applies to those whose total annual earnings exceed £200,000, as they may hit the pensions taper, which can reduce your annual allowance from £40,000 to as little as £4,000.
On average people hit their peak earnings in their 40s. At that point in life there can be many demands on our income, and the idea of retiring early may seem like a distant thought. But your older self could be incredibly grateful to you for sacrificing this extra money for your future.
Volatility can heighten your nerves as you approach retirement, too, causing you to consider postponing your plans. This is when your savings reach their peak — when even a small percentage fall in markets can wipe thousands off your savings in a day. This matters if you are on a defined contribution salary. But the reverse happens when markets rise. Some cash flow modelling at this stage may give you the confidence you need to make the leap.
Accept that as you near retirement you may want to change your plans. Hopefully, you need not abandon them altogether. Your early retirement may become something you glide into, where each year you do less work and play more.
I know of others already in their 50s and 60s who can afford to retire early, don’t particularly want to work, but find it psychologically difficult to give up. Creating a purposeful financial plan for what they might do in those extra years of leisure can help them embrace more confidently the possibilities that finishing work opens up.
Nathan Valbonesi is a chartered financial planner and leads the investment and wealth advice team at Weatherbys Private Bank