Early Retirement

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Can I Take Early Retirement Before Age 55?

Beware of companies that offer to help you to cash in your pension before you’re 55. This could be an unauthorised payment and if it is you’ll pay up to 55% tax on it!

You can sometimes take early retirement before your reach the age of 55. Either if you plan to retire early because of poor health, or you have the right under your scheme’s rules take your pension before you’re 55 and you joined the scheme before 6 April 2006.

You can qualify to take your pension early because of ill health If your life expectancy is less than a year. In these circumstances you may be able to take your whole pension pot as a tax-free lump sum providing all of the following apply: –

1. You’re expected to live less than a year because of serious illness and,
2. you’re under 75 and,
3. you don’t have more than the lifetime allowance of £1,055,000 in pension savings.

Early Retirement At OR After Age 55

Pensions are broadly categorised either as ‘defined contribution’ or ‘defined benefit’ pensions. The way your pension will be calculated depends on the type of scheme you have.

Defined Contribution Pension (Money Purchase Pension)

A defined contribution pension is managed by a pension provider, usually an insurance company. The money you receive when you retire is based on the money you pay in and the performance of your investments. Your money is usually invested in shares, bonds, property and cash.

You can take early retirement at any time after you reach 55. You can draw up to ¼ of your pension as a tax-free cash lump sum. You can draw out more than ¼ as a lump sum, but this might expose you to a large income tax liability. With this in mind, most people draw their tax-free cash lump sum then take smaller regular withdrawal from the remainder of their pension pot. Your pension pot will need to last as long as you do, so the decisions you make when you retire are important.

Your pension has a selected retirement date. It might be set at 55 or possibly later. It’s often the case that your selected retirement date won’t coincide with your intended retirement date. Your pension provider is unlikely to penalise you if you decide to draw your money at a different age to your selected date, but this date does have an impact on how much your pension pot will be worth in the future.

Many pension companies, especially workplace pension providers, gradually move your pension pot’s investments from riskier assets like shares to lower risk assets like bonds as you approach your selected retirement date. They usually call this a ‘lifestyling strategy’. If you’re planning to buy an annuity with your pension pot, either at or very close to your selected retirement date, this type of strategy may work well for you.

If you don’t intend to buy an annuity at or close to your selected retirement date a lifestyling strategy could limit the growth of your pension pot, and this might reduce the income you’ll enjoy when you retire. This is one reason why it’s so important to get retirement planning advice from a professional early on.

You can find out the value of your pension if you contact your pension provider. They might ask you to register for their online service so that you can view information about your pension via their client portal. They might also send you information in the post. You should ask for a projection as well as a valuation of your pension as the projection will give you an indication of what you might receive when you retire.

Pension projections are based on proscribed assumptions. Do use the projection as a guide, but bear in mind that the figures quoted are not guaranteed. Whatever the value of your pension pot, you’ll need to convert it either to an annuity or a drawdown pension before you can draw an income from it.

Defined Benefit Pension (Safeguarded Benefits)

Defined benefit pensions used to be called ‘final salary’ pensions. They’re normally provided to employees who work for the public sector e.g. Teachers, NHS staff, Police, Armed Forces or Government. Due to rising costs most company defined benefit schemes are now closed to new members but you may have retained some final salary scheme benefits if you were a scheme member in the past.

A defined benefit pension promises to pay you a pension and usually a cash lump sum at your scheme pension age. The amount you receive is based on your length of service and your pensionable income.

Your pension will normally be worked out based on your length of service and a factor e.g. 1/60th or 1/80th. To calculate your pension, multiply your pensionable income by your length of service in years and the factor. For example: –

Your salary is £30,000 pa, your service is 40 years and your scheme use a factor of 1/60th – Your pension is £30,000 x 40 x 1/60 = £20,000 pa.

Your length of service is the amount of time you’ve worked as a qualifying member of the scheme. This might be a bit less than the total time you’ve worked. If you’re unsure check with your scheme’s administrator to find out how they work out your length of service.

Your pensionable income might be different to your salary. For example, it might not include overtime or bonus pay. Similarly, your scheme administrator will confirm this for you if you’re unsure.

Older schemes used to base your pension on your salary in the last few years of your employment. The cost of running these ‘final salary’ schemes increased sharply in the late 1990s, and most schemes have now moved from a ‘final salary’ basis to a ‘career average earnings’ basis.

The career average earnings basis is cheaper for the sponsoring employer to run because your pension is based on your average salary throughout your working life rather than on your very best years earnings, typically your earnings in the later years. If you’ve worked for the same employer for a long time you might have accrued some final salary and some career average benefits.

If you were a member of company pension scheme but you can’t find any up-to-date paperwork for it, or if you’ve lost your paperwork, you can use the Government’s Pension Tracing Service to get information about where to apply for your pension benefits.

State Pension

You qualify for your State Pension when you reach your State Pension age. You can check when this is on the UK gov’s State Pension Checking Tool.

Women born on or after 6 April 1953 and men born on or after 6 April 1951 will receive the new ‘single tier’ State Pension. If you were born before the above dates, and you deferred taking your pension until 6 April 2016 or after this date, it will be calculated based on the old system.

How much your State Pension will be is based on your National Insurance Contribution history. You qualify for the maximum amount if you have a contribution history of at least 35 years. For the tax year 2020-21 the maximum new State Pension is £175.20 per week.

Your state pension might be higher than £175.20 per week. If you paid National Insurance Contributions before 6th April 2016 you may qualify for a pension of more than the full single tier amount. It depends on whether you built up some entitlement under any of the previous second tier State Pension arrangements.

You can also defer your State Pension to a later date which normally means your pension will be higher when you finally take it.

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