ii calculates cost of early retirement after pension cash crunch warning

interactive investor calculations follow Bank of England warning on the cash crunch facing many older workers contemplating early retirement.

• £140k extra needed to retire at 55 on a basic income
• £280k extra needed to fund early retirement on a moderate income
• £460k extra pension savings needed to retire early on a comfortable income
• £248k needed to retire at state pension age on a moderate income

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Assumptions: fund size needed after retirement based on PLSA figures, fund size needed before retirement based on ii calculations - 5% investment growth, 0.5% fees, 3% increased pension income withdrawn.

Interactive investor broadly agrees with Catherine Mann’s comments today on the cash crunch facing many older workers who are contemplating early retirement. It’s important for older workers to take stock of their pension situation and plan ahead to see if their money will stretch.

Interactive investor’s calculations show that someone wanting to retire at 55 would need an extra £140k for a basic retirement, an extra £280k for a moderate retirement and an extra £460k for a comfortable retirement. The figures are high because the state pension, soon to be £10,600 per year, forms a big part of most people’s retirement income – retire early and you’ll have a big hole to fill.

The calculations are based on the PLSA Retirement Living Standards, which measure the amount needed in the UK for a basic, moderate and comfortable retirement. 

Alice Guy, Head of Pensions and Savings at interactive investor says: “Saving enough for retirement is a mammoth undertaking and often takes years of hard work and dedication. 

“Retiring early and plugging the gap until the state pension kicks in is tall order – it’s a double whammy because not only are you earning for less time, but you also need to dip into your pension pot for longer, depleting it more quickly. The PLSA calculates that we need around £12,858 for a basic no-frills retirement, and that figure also assumes you’ve completely cleared your mortgage. For renters or mortgage holders, that figure will be a lot higher.

“Of course, many people may have to retire earlier than planned due to a redundancy, ill health or caring responsibilities. They don’t always have time to save extra for retirement and may therefore struggle along with a very low income.

“DWP recent figures, released in the analysis of future retirement incomes data last week, also show that 66% of those retiring in the 2030s with a defined contribution pension aren’t saving enough to meet their retirement needs.

Source: DWP data Analysis of future pension incomes on 3 March

“With so many older workers struggling to save enough, it’s important that the government considers proposals to make it easier for older workers to save for retirement. Raising the punitive £4,000 money purchase annual allowance to £10,000 would help older workers. It would mean that people who return to the workplace after taking taxable income from their pensions can still contribute up to £10,000 into their pension pot.”