There is nothing stopping you from retiring earlier, but you need to ensure you can afford it.
The latest figures from the Pension and Lifetime Savings Association shows that an income of £41,300 per year is needed for a comfortable retirement.
You need to be confident your finances can stretch that far, and possibly higher if you have other costs, without getting a regular salary.
“The challenge for those who want to retire before they receive their state pension is whether they have adequate savings in place to fund a life without unearned income,” said Alice Haine, personal finance analyst at Evelyn Partners.
“Studies have found that many people are simply not saving enough to fund the level of lifestyle they want in retirement and the length of the retirement they want.”
Ms Haine said saving independently for retirement is key and funds can come from multiple sources, such as property, Isa savings, an annuity, a private pension and a state pension.
“Those who want to retire before the state pension age need to make sure their retirement fund – whatever the source – is adequate to fill that gap between retiring and receiving the state pension,” she said.
“The last thing any retiree wants is to give up work, splurge all their retirement savings and then be forced back into work.”
Working after state pension age
It is possible to keep working even after you receive the state pension, but you won’t be building up any more NI credits towards the payments once you reach state pension age.
“You can choose to work full time or phase into retirement through part-time work,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
“It’s also not a one-way street. Once retired you can always return to work if you feel you need or want to. If you find you don’t need your state pension while you are working then you can opt to stop receiving it for a period of time in return for receiving a higher amount later on. However, you can only do this once.”
Another key thing to be aware of is that if you have already flexibly accessed your private pension through drawdown, if you want to continue contributing then you will only be able to put in up to £10,000 per year under the Money Purchase Annual Allowance, rather than the current £60,000.
Retiring vs staying in work
Retiring can give you more time to enjoy your hard-earned pension savings. It is worth planning how much you need in your pension and how best to access it so your fund doesn’t run dry too soon.
There are benefits to working for a bit longer and not taking your state pension, though.
If you continue to work past state pension age, or perhaps have alternative means of income and don’t feel you “need” the extra cash, then you might want to hold off receiving your pension payments for a couple of years. This is known as deferring your state pension.
Delaying or deferring state pension payments can be tax efficient, particularly if you’re still working and state pension income would take you into a higher tax bracket.
It also means you’ll be paid more when you come to claim your payments, as long as you live long enough to enjoy it.
To receive an increase, people must defer for at least nine weeks, after that their state pension rises by about 1pc for every nine weeks deferred, that is equivalent to just under 5.8pc for every year.
For example, someone set to receive £203.85 a week from the full new state pension who then defers for 52 weeks will receive an extra £11.82 a week when they eventually claim the payment. If there is an annual increase in the state pension during the period they defer, then the amount they receive could be even bigger.
If you want to carry on working, it might make sense to defer a state pension to lower the tax burden – particularly for higher taxpayers.
There are risks to deferring, Ms Haine warned.
“Someone delaying the pension will receive more money further down the line, but it will still take time to make up for the state pension they could have added to their bank balance if they had claimed the amount straightaway – so those in poor health might want to consider this carefully,” she said.
“Another consideration is that any extra payments you get from deferring could be taxed, or taxed more heavily, as it might tip your income over the personal allowance threshold or into a higher tax band. “
Gauging how much state pension you should be getting paid can be tricky. The widely publicised figures detail the “full” amount, but there are various reasons why you might get more or less than this.
Variations can be down to your National Insurance record, the date at which you retired (this will dictate whether or not you receive the “new” state pension amount), as well as other variables such as whether you “contracted out”, whether you’re receiving a spouse’s state pension payments, and whether you started receiving state pension payments as soon as you became eligible for them.
This complication has meant that thousands of people are being underpaid the state pension each year without even knowing it. Government errors that have come to light over the past few years meant that in 2022 alone more than £500m in retirement income went unpaid.
While the Government is working to rectify some of these errors, the process of identifying those who are owed money and getting the money to them has been very slow. Therefore, it’s worth taking steps to find out how much you should be receiving, and what to do if it turns out you’re not being paid as much as you should.