Expert Pensions

Early Retirement- Beware of the Risks

Whether or not the idea of “early retirement” appeals to you, one of the main paths to freedom from the workplace is a decent pension. In fact, unless you win the lottery, inherit money, or own multiple profitable rental properties, it is the ONLY path to freedom.

According to the OECD, the average Irish person can expect to live until the grand old age of 82. That means anyone retiring early (let’s say from the age of 55) must consider how they will fund their next three decades.

If you’re weighing up that decision at the moment, you should definitely consult a financial adviser for expert advice.

In the meantime, here are some points to consider:

LOWER INCOME

If you plan to rely solely on your pension to give you an annual income, then the earlier you take your benefits, the lower that income will be — your fund will have to stretch across more years. Consider your standard of living and note down all your outgoings. It’s crucial to be realistic about how much money you will need every month to enjoy life once you are no longer in the workforce.

TAX RELIEF

If you plan to continue working part-time, drawing down your pension early will have tax implications for your other income. For example, if your pension annuity is going to be €25,000 a year, and you earn roughly the same amount from your part-time work, your annuity will push you into the higher rate tax bracket. In this case, it could be more tax efficient to delay accessing your pension.

SOCIAL WELFARE

Many social welfare payments are means-tested. If you are currently claiming Jobseekers Allowance or Disability Benefit, for example, drawing down your pension early could result in the loss of some, or even all, of your benefit payments.

LESS GROWTH

Compound interest helps a pension fund to increase year on year. The longer you leave your money untouched, the more it will grow. Drawing down your pension early will affect the potential investment return of your fund. 

RUNNING OUT OF MONEY

Nobody knows what the future may hold. But you do need to consider the “worst case scenario” if you are planning to retire early. For example, what happens if your mobility is affected by serious illness and you need to adapt your home? Or if bad weather results in your property being flooded? Or if your spouse, who is still working, loses their job and you are both reliant on your annuity? Plan for the worst — and hope for the best.

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