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How ISAs could be the secret to an early retirement

An early retirement is a dream for many of us but more time to enjoy life to the full comes at a cost. ISAs could be the secret weapon in your retirement arsenal.

| 9 min read

Most people are eligible for the State Pension once they reach the State Pension Age. This is currently 66 (67 from April 2026 and rising to 68 by 2046), so if you want to retire before then you need to have a plan for where your income is going to come from.

Check your company pension schemes

Some company schemes have a default retirement date that is earlier than the State Retirement Age and can be as soon as your 60th birthday. They should each send you an annual statement which usually includes an illustration of how much retirement income you could get.

  • For defined benefit (DB) schemes – which are based on your salary and years of employment – the figures quoted are pretty stable and are unlikely to change. They give you the option of taking a tax-free lump sum, but this reduces your annual payments.
  • Defined contribution (DC) schemes – those based on how much you and your employer pay in plus any growth – will assume you want to convert your savings to an annuity. This provides a guaranteed income for life in exchange for an upfront one-off payment. The figure quoted will be based on average lifespans and assumes a generally healthy lifestyle. Again, you can take a tax-free lump sum, but this will reduce the amount left to buy an annuity.

In either case you won’t know exactly how much you can rely on until you ask for an illustration from the provider.

  • If you’re health impaired and you’re not likely to live as long as the average person of your age, you are generally offered a better annual payment as the money will be paid out over a shorter time period.
  • If you want your payments to increase each year or you want to leave an income for your spouse or civil partner, your starting value will be lower.

You can also choose to keep your defined contribution schemes invested and take regular or one-off lump sums from each pot. If you take the tax-free lump sum all other withdrawals are fully taxable as income. If you don’t take the tax-free lump sum the first 25% of any withdrawal is tax free and the rest is taxed.

Finally, if any of your defined contribution schemes do not offer an early retirement date you could think about moving your savings to a different provider, but this might mean giving up some useful benefits like life insurance or guaranteed annuity rates.

Check your personal pensions

You can normally take benefits from your personal pension from the age of 55, although this is set to rise 57 in 2028 and could change in the future. Like defined contribution schemes you should receive an annual statement and like defined contribution schemes there is flexibility in how you decide to use your savings. Some older schemes are not as flexible as newer ones so, again, it is worth thinking about moving to one that is better for your needs.

Consolidating all your defined contribution and personal pensions into one saving plan like a self-invested personal pension (SIPP) can make them easier to administer, and some of your older company schemes might be in default funds that no longer suit your situation and objectives.

By now you should have an idea of how much income you can generate from the ages of 60 and 55. But will it be enough?

How much will retirement cost you?

Try to imagine the kind of retirement you’d like to have and then work out how much it would cost you.

  • What are your basic needs?
  • How much you would like for luxuries, such as holidays, the theatre, and eating out?
  • How much of a buffer will you feel comfortable having for emergencies or spontaneous spending?
  • Do you want to make sure there is enough left over to leave an inheritance?

As a starting point, The Pensions and Lifetime Savings Association (PLSA) and the University of Leicester provide annual research on the cost of living in retirement. This can help you get a picture of how much your preferred lifestyle could cost. The figures don’t include mortgage or rent payments and reflect what you need to spend, not what you need to earn.

LifestyleMinimumModerateComfortable
Single person£14,400£31,300£41,300
Couple£22,400

£43,100

£59,000
What does it provide?Your basic needs, with some left over for funMore financial security and flexibilityMore financial freedom and some luxuries

Source: Pensions and Lifetime Savings Association – Retirement Living Standards 2023. Figures based on per-year spending.

Calculate if you’ll have enough for the retirement you want.

Pension Contribution Calculator

ISAs could be your retirement superheroes

Something many people forget when planning their retirements is the role ISAs can play in generating tax-efficient income. While you remain invested all capital growth and dividend income is free from tax. Accessing your ISA is straightforward, too. Any money you withdraw is also free from tax. This can be a really useful boost.

Alongside the standard ISA, the government has introduced the Lifetime or LISA. If you are between the ages of 18 and 40 the government will add to your contributions with an extra 25% tax free. It’s basically a bonus equivalent to standard rate tax of 20% on a pension. There are a few catches, however. You can only invest up to £4,000 a year (equivalent to £5,000 with the bonus); it’s included in your total £20,000 annual ISA allowance; and you can only use the money as part of the deposit on your first home or you have to leave it until you’re 60 years old.

There are two ways an ISA or LISA could be part of your retirement strategy:

  • You could take money just from your ISAs in the early years of your retirement and draw on your pension later. This leaves your pension savings invested for longer with the potential for improved income down the line. If you want to stop working completely before the age of 55, your ISAs and general investment accounts (GIAs) will have to cover almost all your needs. With recent reductions in capital gains and dividend income allowances, GIAs offer few opportunities to provide tax-efficient income.
  • Once you reach 55 (or 57) draw down small lump sums from your DC and personal pensions that take advantage of the 25% tax-free element to minimise your tax bill, and top-up with withdrawals from your ISA

Don’t forget inflation

The PLSA data revealed a shocking statistic: the cost of retirement has increased by about 17.5% (and by between 8% and 38%) since last year’s report. This is much higher than the official rate of 4% reported by the Office for National Statistics (ONS). This is because retirees tend to spend more of their income on fuel, food and services than the general population and all of these have seen significant price rises in the past two years.

You can find out more about personal inflation rates in this article.

Although inflation is a key component of the New State Pension’s triple lock, it is based on the ONS official rate, not your personal inflation number. This is something retirees really need to think about because you can no longer rely on salary increases, bonuses or overtime payments. Or move to a better-paying job.

Where can I find help?

There are lots of variables to consider when planning retirement income at any age but self-funding your entire lifestyle is fraught with questions. How much will you need, how much should you take from where, and when, to make sure you have enough to live on throughout your third age.

Talking to a financial coach can help put you in control of your retirement strategy; or speak to someone who can help you put together a financial plan that gives you all the answers you need.

Find out more about financial coaching and financial planning.

If the numbers still come up short all is not lost. Consider part-time retirement. Ask your employer if you can work fewer days per week. You could also look at contract positions or consulting that allow you to choose how much work you do, and when, and for whom.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

How ISAs could be the secret to an early retirement

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