The future's tough for middle-aged dreamers

A survey this week shows that an increasing number of people, mostly between 40 and 60, are scheming how to break their financial shackles and retire early to travel the world. But a pensions expert warned that if they want to turn that dream into reality they had better be prepared to win the Lottery or save a golden nest-egg.

Abbey National and BMRB asked 1,000 adults about how they saw the future, and found most with a flexible mortgage are aged 40 to 60 and want to live more adventurous lifestyles. Given the chance, 27 per cent of this age group would choose a sabbatical from work, and 16 per cent would travel. Eight 8 per cent would safari and 7 per cent would go on an adventure holiday such as white-water rafting, but for 31 per cent their dream holiday is to travel the world.

Half of those surveyed said they no longer had to raise children, so they could afford to make overpayments on their mortgage. More than a third would overpay so they could retire earlier, and a quarter would pay extra so they could free cash to enjoy later.

Ruth Mathieson, from Falkirk, Stirlingshire, said: "My partner, John, and I run a training company and we want the freedom to pay in lump sums or take repayment holidays, and, hopefully, pay off our mortgage early. So an Abbey National flexible mortgage suits us perfectly."

Guy Aldwinckle, Abbey National's head of mortgage marketing, said: "These findings show the middle-aged are aiming for more freedom and flexibility with their financial commitments, and are using their mortgage choice to achieve this. Rather than see it as a 25-year burden, they are picking and choosing mortgage features which will fit their lifestyle, as well as seeking a competitive rate."

But while they might be able to escape their mortgage, Jason Butler of Bloomsbury Financial Planning believes they should first sit down and decide what they are going to do with their time.

"I always tell my clients they shouldn't ever retire, mentally," Mr Butler says. "I prefer to see it as a time when people can do what they want to do rather than what they have to do. Unless you are obsessed with gardening or golf, you should choose a range of activities and decide what is important to you, whether it is charity work, writing or consultancy. It's about quality of life, not quantity of life."

But Peter Quinton, of the Annuity Bureau, says people who want to end their careers early could have their work cut out to acquire a big enough treasure chest to enable them to retire in comfort at 50. That is the earliest age at which a personal or occupational pension can be converted into a regular annuity without losing tax privileges, although last December's government Green Paper on pensions proposed raising this starting age to 55.

Mr Quinton says: "For healthy 50-year-olds, there has to be a message of realism. A man aged 50 today can expect to live 34 years, a woman 37 years. That is a hell of a long time to be living off savings. Even then, the mortality tables are based on the past, and are continually having to be revised upwards. And if you have the sort of money to be able to think about retiring at 50, the odds are that you will live longer than average, for the wealthier live longer than the poorer."

This makes it vital for anyone retiring early to take an annuity which has built-in protection against inflation. Otherwise, the arithmetic is remorseless. Even if we assume inflation stays as low as 2.5 per cent, after 20 years £1,000 has the buying power of only £603 in today's money, and only £468 after 30 years. Assume 5 per cent inflation over the foreseeable future and the spending power of £1,000 is torn to shreds. It is worth only £358 after 20 years and just £215 after 30 years. And a fit 50-year-old might have 10 more years to live after that.

That makes an inflation-proof annuity essential, to maintain the value of the income. The snag is that, for any given sum, an index-linked annuity starts at a much lower level than the flat-rate equivalent. A 55-year-old man can buy a flat annuity of £5,853 a year from Canada Life for £100,000. But with inflation-proofing, the Annuity Bureau says £100,000 will get someone of the same age only £3,879 a year from the best provider in that market, Norwich Union. To put it the other way round, an inflation-proofed £5,853-a-year annuity will cost £151,000.

Mr Quinton says: "I would split the pot between inflation-proof and investment-linked annuities, putting the absolute minimum in the inflation-proof one and relying on the investment-linked element to product better returns."

So you want to retire early?

* Know your financial position, net worth, income, spending;

* List what you want to spend it on, and see if there is anything you can drop: the more you spend now, the less you will have in retirement;

* Work out your likely lifespan (several websites can help).

* Get pension and annuity projections to see how much you will get;

* Think in terms of cash inflow and outflow. Your house may be worth £1m, but it produces no income unless you rent out rooms;

* Decide what sort of things you want to do, and what they might cost;

* What is important to you? It may be seeing your grandchildren or seeing a sunset on the Rockies. That will help you focus.

* If you do decide on a job or a small business, take it seriously. Employers don't want someone who is half-hearted;

* Do your homework. There is plenty of material on the internet and in libraries on retirement planning.

* Start planning now. Do not put it off until a few months before you want to give up your job. You will be surprised by how much you will change your plans along the way.

'Our drawdown pension is scary'

Bernard Kelly had always wanted to retire early, but then he had to, for the worst of reasons; his wife, Ivy, became terminally ill. But he had been putting money aside to provide an income.

Mr Kelly's time is taken up caring for Ivy and tending the two acres around their house near Alton in Hampshire. "I retired last year at 58," he said. "We had known a year before that Ivy would need care, so we just stopped the food business we had been running together."

They have stock market investments, which they do not want to sell while the market is down. But they had always contributed to a pension plan.

"Unfortunately, it was with Equitable Life," Mr Kelly said. "As the Equitable situation became more and more desperate in August 2001 we went to the Drawdown Bureau for advice."

They found they were in the right arrangement, allowing holders to take 5 per cent a year out of their pension pot. But not with Equitable. The Kellys moved to Winterthur Life's property pension fund. But they had to leave several thousand pounds with Equitable as a market value adjuster.

Mr Kelly said: "If I want to take a reasonable drawdown our fund is going to have to produce 6 to 7 per cent growth a year to keep up. That is scary. People shouldn't rely on a pension, You must have something else to fall back on in case your pension fund lets you down."