When it comes to retirement, most people will rely on their workplace and the state pension.
However the problem with pensions is that they are taxed and force you to retire later in life.
What if there was a way to retire earlier and then access your pensions when the time comes?
With a workplace pension, you can only access it from age 55+ and must pay tax on your money.
The State Pension is a type of income paid to those who are eligible but after the age of 66.
With an Individual Savings Account (ISA), you can access your money any time and tax-free.
In this article, I go through the pros and cons of each of these types of retirement accounts.
I also talk about which accounts you can open and the tax advantages of each type of account.
Finally, I talk about how to get started and where to go to find more info on ‘early’ retirement.
What I think of Workplace Pensions
Workplace pensions refer to the pension scheme you can sign up to as a company employee.
The pension scheme that you will have usually depends on the size of company you work for.
They sound great in theory: contribute a given percentage (4%) from your salary every month.
As well as that, your employer will contribute a certain percentage also (usually around 3%).
As if that wasn’t enough, the government also chips in a bit to the pot (usually around 1%).
So in total, you just went from contributing 4% to 8% a month – what’s not to love about that?
But here’s my issue with these pensions: they’re taxed and force you to retire later in life.
Let’s say you’ve achieved a pot of £1 million by age 50 and are ready to retire – that’s too bad.
If you’re looking to take out money early, be ready to pay 55% tax on whatever you take out.
Let’s say you wait until 55 and are ready to start withdrawing all your money – that’s too bad.
Just like back when you were working, you’ll still have to pay tax on whatever you withdraw.
So as you can see, pensions are not my favourite type of account for investing for retirement.
Should you Opt Out of Workplace Pensions?
As you’ve picked up from the last paragraph, pensions are not my favourite type of account.
They force you to work until at least age 55 – oh and this age will be increasing to 57 in 2028.
That’s right, withdrawal age keeps increasing – who knows what it will be 10 years from now.
As well as that, you’ll still get taxed on all that money you managed to save up for retirement.
I can’t believe governments keep getting a pay cut on the money we save up for retirement.
So should we just opt out of workplace pensions entirely – call HR and tell them we want out?
This answer may surprise you, but no – I would not opt out of my workplace pension scheme.
The reason for this is because of the extra contributions from your employer and government.
These contributions essentially double your own contributions to your pension each month.
Although I don’t like pensions, I think they are an important part of your retirement equation.
What about the State Pension?
State Pension is money paid out by the government to people who are eligible to receive it.
The current state pension (2023-24) will provide up to £10,600 per year per person – not bad.
That means that if you are part of a couple, you will each get £10,600 or £21,200 in total.
You’ll usually need at least 10 qualifying years on your national insurance record to receive it.
But here’s my problem with the state pension: the money is taxed and can only access it late.
The state pension age is 66 – that is over 10 years after the current pension retirement age.
However, this age isn’t fixed; it’s due to increase to 68 in the coming years, not yet confirmed.
Also, similar to a workplace pension, this income is taxed – the government needs their share.
Depending on what your pension income is, you’ll have to pay tax on the total pre tax amount.
While I am not a fan of the state pension, it is free money as long as I meet the requirements.
This is where ISAs Come in
So we’ve talked about workplace pension (55+) and state pension (66+) to fund retirement.
There’s a 3rd account type we can save into to fill in the gap: Individual Savings Account (ISA).
An ISA is the perfect type of retirement account for those who are planning on retiring early.
The reason I say this is because there is no minimum withdrawal age and you don’t pay tax.
It is not taxed because there is no tax relief on this account – so you fund it with your income.
It is not taken from your salary, you just pay into it as if you were paying into a savings account.
As well as that, you can withdraw money from your account at any time without paying fees.
That means if you want to retire at say 50 you can use your ISA to start your early retirement.
And all the money in your account is yours to keep – you don’t need to pay any of it in taxes.
The only ISA drawback is there’s a maximum of how much you can add to it per year: £20,000.
However, unless you’re planning to contribute more than £1000 a month, I think you’re fine!
Your Retirement Execution Plan
So let’s say you’re 30 years old and want to retire in 15 years’ time, here is what I would do:
For the next 15 years, you keep contributing to your workplace pension and to your ISA.
To figure out how much you need to add to your ISA to retire, I wrote an article about it here.
Once you reach 45 years, you can now retire using your ISA by withdrawing money from it.
Use your ISA to fund your retirement for the next 10 years using a good withdrawal percentage.
Once you reach your pension retirement age (57+) you can then start withdrawing from it.
You can now use your pension income to supplement your ISA income for the next decade.
Finally, once you reach state pension age (68+), you can start receiving your state pension.
You now have income from your ISA, workplace pension, and state pension to fund retirement.
As you can see, thanks to your ISA, you don’t have to wait until 55+ to start early retirement!
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If you are interested to find out more about early retirement, check out: Quit Like a Millionaire.
In the book the authors talk about how they were able to retire early/comfortably in their 30s.
To find out more about ISAs and early retirement strategies, check out my investing articles.
I talk all about which platforms to use, which funds to invest in, and which accounts to have.
Are you on the way to early retirement? Do you have an ISA? Let me know in the comments!
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