Early retirement – how does this effect your pension?

Thinking about retiring early? Or you may be stopping work early due to redundancy, ill health or another reason. Your state pensions and your other pensions may be affected. To ensure you have enough to live on in retirement you need to know all of your pension options.

Contents

– Retirement age, claiming your pension

– Changes to State Pension age

– State Pension & Early Retirement

– Early Retirement and personal or workplace pensions

– Defined Contribution

– Defined Benefit pension schemes

Retirement age, claiming your pension

Although you can retire at any age, you can only claim your State Pension when you reach State Pension age.

For workplace or personal pension, you would need to check with the scheme provider to find out when is the earliest you can claim your pension benefits and retire. If you are retiring due to ill-health then you may be able to claim your pension before the set age but all scheme’s vary so you would need to double check.

If you have serious ill-health and your life expectancy is less than a year you can retire at any age, you can take up to 100% of your pension fund as a tax-free lump sum. If you are married/ have a civil partner you will be able to retain up to 50% of the pension fund, this will then be used to provide for a survivor’s pension.

Changes to State Pension age

The State Pension age is increasing as life expectancy increases. To find out what the current State Pension age is click here:

State Pension & Early Retirement

You can claim your State Pension as soon as you reach your State Pension age, if you retire before you reach you state pension age then you will have to wait to claim your state pension until you reach the eligible age.

If you retire early you may receive less when you reach your state pension age this is because you receive a state pension by building up enough ‘qualifying years’.

What is a qualifying year? A qualifying year is a tax year in which you have enough earnings on which you have paid National Insurance contributions. It also includes a year in which you are treated as having paid or have been credited with paying NICs.

Boosting you National Insurance contributions (NICs)

You can improve your NICs record, you can do this by paying voluntary NICs. Also, if you take on a part-time or casual work and you pay NICs this may add to your NICs record.

Early retirement and personal or workplace pensions

Retiring early could also affect your personal or company pension. The rules for personal and company pensions can vary, depending on who provides them. You need to check your personal or company pension to find out how an early retirement can affect your pension.

Remember this when looking at workplace pensions:

  • your workplace scheme may not allow you to take your pension before the normal retirement age of the scheme
  • if you retire early through ill-health there may be special terms in the scheme rules that allow for the pension to be enhanced
  • if you’re made redundant with a pension, you could delay drawing it and let it build up
  • if you are going to work again, check the rules about transferring your old pension to a new employer’s pension scheme
  • if you’ve had several jobs, you’ll need details of all your pension rights

These are complicated points and you may benefit from getting financial advice.

Defined Contribution

Sometime referred as ‘money purchase schemes’. If you are a member of a personal pension, stakeholder pension or workplace money purchase scheme, remember that:

  • you’ve had fewer years to pay in, so your pension fund will be smaller
  • your pension fund will need to provide you with an income over a longer period, so the pension you get will be smaller

If you’re retiring early due to an illness that’s likely to effect your life expectancy, then some providers may boost your pension.

Example

If you started paying into your pension at age 35 with a life expectancy of 85 then:

  • if you retire at 55 the fund built up over 20 years must last 30 years
  • if you retire at 65 the fund built up over 30 years must last 20 years

If you’re retiring early due to an illness that’s likely to affect your life expectancy, then some providers may boost your pension.

Defined benefit pension schemes

These are also known as ‘final salary’ schemes. With these schemes the pension you get when you retire is usually based on a fraction of your salary. This fraction is then multiplied by the number of years you were a member of the scheme. So if you’re considering early retirement you’ll probably receive a smaller pension.

These are often referred as ‘final salary’ schemes. With these schemes the pension you receive is usually based on a fraction of your salary. This fraction is then multiplied by the number of years you were a member of the scheme so if you’re planning on retiring early you may receive a smaller pension.

Example 1

If you started paying into your pension at 35 and the pension is based on 1/80 of your final salary, then:

  • retiring at 55 would give 20/80 of final salary
  • retiring at 65 would give 30/80 of final salary

Many schemes also reduce the annual amount of pension they pay if you take payments before the scheme’s normal retirement age. This is to take account of the fact that your pension is being paid for a longer period.

Example 2

Nathan is a member of a pension scheme that has a retirement age of 60. He retires at age 58 having built up a pension which is 35/80ths of his final salary. The pension scheme reduces the annual rate of pension by five per cent for each year if a pension is taken early. This means that Michael’s pension will be reduced by 10 per cent because it is paid two years early.