It used to be that most of us had very little choice about when we retired. We would have to wait until state retirement age before we stopped work, and access both our state pension and our employers pension then. Companies applied a default retirement age, which meant they compulsorily retired workers when they reached the age of 65.
But we are all living longer, and the rules have changed. At Continuum we are looking at those rules, and at the possibilities of early retirement.
When can you retire?
There is no longer a set age at which we have to retire. It’s basically up to you and just as you can continue working until you are ready to stop, you can retire early if you wish.
But you will not be able to claim your state pension until you reach state pension age. For both men and women, this is currently 66 and scheduled to rise to 67 between 2026 and 2028.
If you are going to retire before that date, you will need to have sufficient funds in your employers pension or your own private pension pot.
The time when you can take money from your pension pot will depend on your pension scheme’s rules, but it’s usually after you’re 55, soon to be 56, essentially ten years before your state retirement age.
But will your scheme let you retire?
Most private pension schemes will allow you to retire early if you so wish.
Employers pension schemes may be a little more complicated. If you’re in a defined contribution pension, you can generally access your money in a way that suits your retirement plans at 55. At this point, you’ll also be able to withdraw up to 25% of your pension tax-free. However, some schemes will have a ‘normal’ or ‘selected’ retirement age and if you access your pension plan before this date, they may expect you to pay an early exit penalty.
There is an exception to this rule. If you’re seriously ill and need to access your money early, it may be possible to access your pension pot early. If your life expectancy is less than a year you may be able to take your whole pension pot as a tax-free lump sum. This should be arranged with your pension provider who will be able to tell you how this works and whether you will be eligible. Some pension funds will keep at least 50% of your pension pot for your spouse or civil partner.
Some companies offer to help you get money out of your pension before you’re 55. This is likely to be a scam based on an unauthorised payment. If it’s unauthorised, you will have to pay up to 55% tax on it.
The pension pot that you build up will probably be smaller if you retire early, because it’s had less time to increase in value.
Will you have enough in your pension pot?
For most people, the decision about whether or not they will retire early comes down to the amount of cash they have in their pension pot.
Remember, retiring ten years early not only means ten years less contributions to your pension pot – it means a decade less of compound interest to grow your funds.
The problems may not end there. If you give up working early, your state pension could be lower. This is because the amount you get is based on the number of years of National Insurance contributions you have made. You need 10 years’ worth of contributions to get any state pension at all, and 35 years’ to get the full state pension, currently £175.20 a week. If you retire early without the maximum number of years, you could get a lower state pension amount when you eventually reach state pension age.
What can you do
Fortunately, with some forward planning and expert help, it may be possible to retire early with a pension pot that is more than adequate for your needs. At Continuum we can provide the expertise you need, look at ways to make your pension savings work harder, and help you hit your pension targets – while staying clear of scams and tax pitfalls.
Whether you are planning on cutting down your hours or giving up work altogether, you will need to ensure that you have the finances, as well as the necessary life skills in place.
At Continuum we can help you look at your pension arrangements as part of a full pension review that leaves you a great deal better off – and your future a great deal brighter whether or not it includes retiring early.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation advice.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.