Could redundancy be an opportunity for early retirement?
We have all felt the social impacts of the changes to the world we live in over the last four months. However, as we begin to emerge from lockdown and return towards social normality, the economic realities of the pandemic are only just beginning to bite.
We have been partially sheltered from the impacts of possibly the worst global economic shock the world has ever seen, due to government support. For many individual workers, the furlough scheme has protected income, at least to 80% of their pre-crisis levels, but there has also been support for businesses in the form of grants and loans. Asset prices have also been supported by levels of central bank support eclipsing even those issued during the credit crisis.
The reality of the economic situation is that without continued stimulus and support, households are likely to begin to see the impacts over the summer and into autumn as businesses adjust to their limitations under the reopening restrictions and the furlough scheme draws to an end.
Companies are likely to begin redundancy programmes in earnest, such as those already announced by large companies like Rolls Royce, Centrica and British Airways.
Could this be an opportunity for retirement?
For people aged over 55, this shock of redundancy may present an opportunity to look into their retirement options. Many people have had a shift in outlook during the pandemic which may make early retirement more attractive. Maybe lockdown has made you appreciate more simple things and you no longer believe you will need as much income in retirement. Maybe it has put pressure on your children and you want to help them out with childcare to reduce their burdens or maybe you just wonder how many years you will get to enjoy retirement and simply think if you can afford to retire, why wouldn’t you?
Steps for turning redundancy into retirement
Consider the redundancy offer carefully
- Is it structured in the most tax efficient manner?
- Does it come with guarantees about any defined benefit pensions?
- How does it compare to your anticipated net income before retirement?
Analyse your circumstances
- Get together records for all of your pensions and savings.
- Work out how much you spend each month.
- Agree on any objectives you have such as holidays, cars, home projects.
- If you’re married, discuss whether one or both of you will retire.
- Think about part time work to subsidise pension income.
Model your assets vs your expenditure
- Cash flow modelling shows the probability of your income being sustainable.
- More importantly, it shows the minimum you can expect at 100% certainty.
- It will take into account secure income such as State & Company Pensions.
- It will model tax planning to ensure you don’t pay more tax than you need to.
Potential issues to consider
Most people underestimate their expenditure. You must have the discipline to go back through statements (pre-crisis) and analyse what you have actually spent, not what you think you spend.
Many people are tempted by transfer values on company pensions, without considering the value of the secure income which can, in most cases, be drawn early subject to an actuarial reduction. Remember that taking the income early means it is paid for more years, and you may receive more back this way than by taking a transfer.
The tax-free cash ‘lump sum’ available from pensions can be useful if it is needed to fund a single, large expenditure. However, if it is not, it can be paid regularly alongside taxable income to ensure maximum tax efficiency of your pension. Every bit of the pension that can be extracted without tax adds to the viability of an early retirement plan.
Initially, you need to think about whether this is going to be a good lifestyle decision for you. Early retirement doesn’t suit everyone.
If you have decided that it is, you should engage with your employer’s redundancy programme to see what is on offer and discuss the options as soon as possible with a financial adviser, to begin building retirement models and evaluating the viability.
We’re here to help and answer any questions you may have. Get in touch today to discuss how we can help you.