What is a financial bridge- and do I need one?

So, you understand what F.I.R.E is- its retiring rather earlier than the normal, average, person- whether that’s 40, 45,50 or even 65 (with the state pension age going up to at least 68 for younger people, 65 maybe considered early!). So, how are you going to ensure that you have enough money to live? A Financial bridge- that’s how.

Pension

The issue with using a pension to retire early, is that you are not allowed to take it before you get to a certain age. That doesn’t mean that you don’t want to use your pension to help you F.I.R.E- because you most certainly want to, but you don’t want to have this as the only tool in your arsenal to retire early. The current earliest you can take money from your pension is 55, but this is likely to change soon to approx 58. It is normally set to 10 years before the state pension (with this age also set to raise in the future).

State pension

Well, currently this is set at 65- but its under review currently, if you fill in some answers here– you can find your projected age- though note this may change in the future.

So, you will have now realised, that although you might have enough saved in your pension- you can’t access this early, and you need the money now in order to live. What do you do? Build a financial bridge!

A financial bridge

It’s literally just the means to get from the current point in life to your pension- where (hopefully) you will have enough to live for the rest of your life. The best way to prepare this bridge is to use an ISA. Now, I’m not going to go over the different types of ISA in this post- you can see my post here for that.

You get a massive allowance of £20,000 per tax year (per person, if you are in a couple), that you can shelter from tax. So, if you manage to fill your pot each year, from age 30-50, you would have £400k of contributions + the growth in whatever you have invested in (hopefully index funds, post coming on that soon!). Please remember that you also need to contribute to your pension- otherwise you aren’t really building a bridge- and more just a pot of money that has to last forever. Pension tax treatment in the UK is hugely advantageous (see this post for more information)

If you have more than £20k to save/invest, then there are other places that you can put this money to continue to build your financial bridge- just be aware that pension contributions are likely a great draw- you need to balance this with the fact you cannot withdraw these early!

Just remember, that this is all a balance- if you don’t have any money saved in ISAs, then you won’t be able to access the extra money you might have in a pension- until you reach pension age. On the other hand, if you end up with “too much” money in your ISA- then you are going to miss out the tax benefits of having it within a pension. Though, current rules, allow you to continue to make small contributions- even without any taxable earnings (currently, £2,880 per tax year) and claim tax relief of 20% on this.

So, to recap:

  • Use ISA allowance to save for your early retirement age > current retirement age set by the government (for private pensions)
  • Use private pension for current retirement age > state pension age
  • Make sure you financial bridge is “strong” enough to bridge the gap between retiring early and pension(s)

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