There is a lot to be said for an early retirement, but it really revolves around the existence of sufficient assets and a healthy pension annuity for an individual to be able to afford it and this is sadly not the case for most people. In a recent survey commissioned by financial services firm MGM Advantage 10% of us want to retire at 55, with most people planning to retire at 60 or 65.

But for those thinking of retiring early and unsure if they can afford it, a change to the pension regulations in 2006 could be helpful. The minimum income from income drawdown was lowered to zero. As a result, at 50 (55 from 2010) individuals can switch their pension fund into an income drawdown policy, take their tax-free cash lump sum and not touch the rest of their pension.

For individuals with a substantial pension fund, a nil income approach to drawdown could mean using tax-free cash to pay off debts, or a mortgage, while the remainder of their pension fund is still invested in growth assets. Alternatively, a relatively small income could be used to bolster earnings as necessary.

While income drawdown has its benefits for early retirees, there is the risk that investments could go down in value as a result of poor investment choices or tough market conditions. Against this, lifetime annuities do offer a guaranteed income.

Kim Lerche-Thomsen, chief executive of  fixed term annuity specialist Living Time, said, “A conventional annuity is one decision in life that you cannot change. You can change your car, your house and even your sex, but not your annuity.”

“At 60, your chances of dying are very small. Even at 75, there is only a 2% chance of dying,” Lerche-Thomsen said. As a result, delaying annuitisation could lead to a higher income when a lifetime annuity is purchased.

Standard Life pensions policy manager Andrew Tully said products allowing retirees to invest in the stock market, but with a guarantee that their income would not fall, would suit part of the market. “We think there is a quite a good opportunity here. It is not for everyone, but it is attractive for those who don’t like the extremes of drawdown and annuities.”

To consider retiring early, the starting point must be to accumulate sufficient assets to be able to consider early retirement in the first place.

This entry was posted on Thursday, July 24th, 2008 at 11:26 am and is filed under General, Important considerations. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.