Taking an early pension

If you’re nearing the end of your career and are thinking of taking early retirement, there are a few things you’ll need to consider before you cash in your pension.

While it may be tempting to retire as early as possible, it’s important to calculate how much income you’ll receive and ensure you can afford to retire.

Here are five key things you should consider when deciding if it makes financial sense for you to take an early pension.

1. Are there any rules to taking an early pension?

While you can decide to stop working at any age, you won’t be allowed to access your workplace pension until after your 55th birthday. In 2015 new rules to taking an early pension came into effect and pension savers now have greater control of their money than ever before.

It’s possible to withdraw the money in your workplace pension (also known as a personal pension), in lots of different ways.

You could:

PensionBee offers four investment pathways that are designed for people looking to draw down money from their pension.

Whichever method you choose to access your pension, you can take up to 25% tax-free. At the moment you can take your pension from the age of 55, however this is expected to rise to 57 in 2028.

Taking money out of an annuity early

An annuity is a lifelong agreement between you and the annuity provider, where the provider pays you a guaranteed monthly income for the rest of your life.

It’s usually not possible to take money out of an annuity early, at least without being hit with a hefty penalty charge.

Some providers allow a few exceptions to this rule, including:

  • a 30-day cooling off period, following the purchase of an annuity
  • when the annuity is worth less than £10,000
  • if you can no longer work due to severe or terminal illness

For clarification, speak with your annuity provider.

2. When can I take my State Pension?

The State Pension age is currently 66 for both men and women, rising to 67 by 2028.

State Pensions work a little differently to workplace pensions and you can’t claim an early state pension before your mid-sixties, regardless of how early you retire.

To qualify for any State Pension you’ll need to have a National Insurance record of at least 10 years, rising to 35 years for the full State Pension. You can check your State Pension eligibility on the gov.uk website to find out what you’re entitled to.

3. What are the benefits of retiring early?

From a slower pace of life to spending more time doing the things you love, there are lots of benefits to retiring early.

The freedom of not being at work will allow you to spend more time with your friends and family and you could take a more active role in caring for grandchildren, for example. You can also travel to all the destinations you’ve always dreamed of visiting and enjoy new hobbies and adventures.

There’s also the cash rewards that come with taking an early pension. If you choose to take your tax-free lump sum early you can spend the cash on whatever you like, such as paying off your mortgage, home improvements or helping loved ones get on their feet.

You may also find that your general health and wellbeing improves after you retire. In theory, you should have less stress and won’t need to deal with the pressure of commuting, for example. Retirement will give you the opportunity to take life at a more leisurely pace, but can also give you the time to become more active if you wish.

4. What are the considerations of retiring early?

While withdrawing money from your pension early has a lot of benefits in the short-term, you’ll need to consider what your quality of life will be in the long-term.

It’s good news that we’re all living longer. In 2017, data revealed that a 65-year-old could expect to live for another 22.8 years, or 33.6% of their adult life. The bad news is that this means your pension will have to last you for around 20 years, on average.

The earlier you retire, the fewer years you can save into a pension, and the smaller your pension pot will be. It will also have to last you longer, so if you withdraw most of your pension early on in retirement, you could be at risk of a pension shortfall.

Pension tax is also a consideration as if you decide to access your pension via drawdown, for example, you’ll have to pay income tax on each withdrawal (after the initial 25%). Depending on the size and frequency of your withdrawals, drawdown tax could have a significant impact on the size of your pension pot.

While there are steps you can take to prepare for an early retirement, you’ll need to plan several years in advance. It may be the case that a phased or gradual retirement is a good compromise, where you can reduce your working hours, but continue paying into your pension for longer.

5. Should I take my pension early?

Before you leave your career behind, it’s important that you calculate how much money you’ve got saved. You can use a pension calculator to work out the income your pension will pay you for each year of your retirement.

For example, if you want to retire at 55, with a retirement income of £25,000 a year, simply input these details into the calculator, along with your current age and savings total. It’ll then tell you how much you need to save each month to achieve your target. If the level of pension contributions you’ll need to make is unrealistic, try inputting a higher retirement age until your goal is more achievable.

The earlier you start investigating your pension the sooner you’ll find out if you can afford to take early retirement. Locating your old workplace pensions will give you a good indication of the size of your pension pot. PensionBee can help you find and combine all of your old pensions and consolidate them into one simple plan.

Free pension advice for early retirement

If you’re not sure whether taking an early retirement is for you, or perhaps you might just have some questions before you do, consider seeking independent financial advice.

Speaking with a qualified adviser can help you understand the practical implications of an early retirement on your finances, and may also help put your mind at ease.

The government’s Money Advice Service directory of regulated advisers is a good place to start.

Taking your pension with PensionBee

Drawdown is simple with PensionBee. Our service combines and transfers most old pensions into one easy to manage online plan. Funds are managed by some of the biggest global investment firms such as BlackRock, State Street Global Advisors, HSBC and Legal & General.

You’ll be able to track how your funds are performing through an online dashboard and once you reach 55 (57 from 2028) you can access your money in just a few simple steps. As long as there are no issues verifying your bank details, it will take around 10 working days for you to receive your money.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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