Early retirement may be more achievable than you realise. Yes, it requires forward planning, and some research, but changes to the mortgage market for retired people have greatly expanded the possibilities. So here are six things to think about if you’re dreaming about leaving the daily grind behind.
1. Check your state pension
Of course, you may well have a private pension as well, but for many people, the state pension represents a significant chunk of their retirement income. You can read more about when you will be eligible for your state pension here. Also, check your contributions record with the Department for Work and Pensions. If it’s less than you were hoping for, all is not lost – you can buy in added years.
2. Check which type of workplace pension you currently have
There are two main types of workplace pension. The old-style final salary schemes are now called defined benefit pensions and are pretty rare outside the public sector. The newer types of pension are called defined contribution schemes. Which type you have will affect the amount of retirement income you can expect. Your current employer should provide an annual update on your expected income. For more information on the different workplace schemes, check the Money Advice Service
3. Check equity release – but remember it’s just one option
Many people who want to retire early, feel that the only way to achieve this is to downsize, and pay off the mortgage. However, there are many more possibilities than there used to be, for borrowing into retirement. Equity release remains an option, and these products now offer equity protection. You’ll also find that many schemes allow you to pay part of the interest off at intervals of your choosing. Some also allow you to pay back a set percentage of the capital each year. Some people love the fact that the interest rate is fixed for the life of the plan. This is a specialist area, so do take advice. Which has a good guide to equity release.
4. Check out Retirement Interest Only mortgages (RIOs)
You have a number of options if you want to retire early, maintain your borrowing and remain in your current home. Major building societies and other big names in finance are now offering RIOs. The loan only has to be repaid when you die, or move into long term care, and most are portable if you want to move later. The Money Advice Service has a good briefing on RIOs.
5. Remortgage for the long term
Some lenders are now offering mortgages an age limit of 85 or 90 for repayment. Extending the term of your mortgage can hugely cut your monthly repayments, and may make early retirement a possibility, even without your state pension. Contact a good broker, either fee-based or free, for advice on this fast-developing market.
6. Use tax free allowances to top up your income
Air BnB or lodgers, could help to top up your income. What’s more, up to £7,500 of income from the “Rent a Room” scheme is tax free. Or run a micro business – a little known act of generosity from HMRC allows you to earn £1,000 from a business tax free.
Retirement sometimes seems depressingly far in the future, if you want to stop work soon. But if you get an accurate idea of how much pension income is available and when, check out your mortgage options and make the most of tax free income – you could make that early retirement dream come true sooner than you think!
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