Early birds and nest eggs

Thinking of taking early retirement?
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The Independent Online
Thoughts of early retirement will be particularly in the minds of many teachers at the moment as a result of the Government's decision to make local authorities and schools, whose budgets are already cash- strapped, responsible from 1 April for paying the estimated pounds 480m a year pension cost of teachers taking early retirement.

This will mean far fewer teachers will be offered early retirement and, in some parts of the country, the option will cease to exist. This has led to a flood of early retirement applications from teachers hoping to beat the deadline.

Teaching unions have been inundated with calls from members seeking guidance on whether they should rush in and opt for early retirement if offered it by their employer.

Whether you are a teacher or in any other occupation faced with the early retirement option, it is essential to consider the financial implications of stopping work before any final decision is made.

First thoroughly check what your pension entitlements are. Don't be put off about asking for clarification of any jargon used in the statement, and compare the benefits on offer against the salary and then pension you would receive if you continued working until normal retirement age. Also consider the options carefully in respect of any Additional Voluntary Contributions you have built up.

Next draw up a personal budget. List your monthly income and outgoings now and compare this with your estimated position if you took early retirement. Will the pension be enough to meet your main monthly commitments such as the mortgage? Don't forget to allow for some future inflation if your pension is not index-linked.

This will enable you to see what surplus money you can expect to have in early retirement and whether this will be sufficient to achieve the lifestyle you want. There is little point retiring early if you cannot enjoy the extra time on your hands.

You may want to consider what part-time work opportunities there are to supplement your income and whether such work would really enable you to reap the benefits of early retirement more than staying in your current full-time employment

It is also important to consider how your tax position may be affected if you take early retirement, not just the impact on pension income, but also what it would mean for any existing savings you have built up.

Find out any state benefits you may be entitled to as this may help your income position. The state pension will not be payable until you are 60 (for women) and 65 (for men). However, it is useful to obtain a forecast from the DSS of what your state pension, including any Serps entitlement, will be when you get to these ages, even if they are some years off. This can be done by completing and sending form BRI9 (obtainable from local DSS offices) to the DSS information centre.

Your early retirement pension details will show whether you are entitled to a lump sum as part of your early retirement package. You may even be given the option to take a reduced pension in return for such a sum.

As this could be the last significant lump sum you receive, you will need to consider whether it is adequate to meet all your planned expenditure in the next few years - for example, a new car and home improvements.

Also consider whether the money could be best used to repay some or all of the outstanding mortgage early. If your mortgage is under pounds 30,000 and you are getting tax relief on all or most of the interest you are paying it may be better to keep it going.

You should find out whether any of the vast range of investment products available including PEPS and Tessas would realistically help you financially in retirement. There are some attractive packages on offer. But remember the old saying, "any investment that is too good to be true is".

Don't forget that if you take early retirement, you will no longer be covered by your employer's death-in-service scheme and a review of your life assurance requirements will be required. Check from the pension entitlement details what widow's / widower's pension would be payable in event of death in retirement.

The option of early retirement offers both opportunities and pitfalls, especially financially. It goes without saying that thinking through the issues before any final decision is made is absolutely imperative, particularly if the option is thrust in front of you by sudden changes, such as the one facing the teaching profession nown

The writer is marketing director of IFA Frizzell, a subsidiary of Liverpool Victoria

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