If you retire early, or stop working due to redundancy, ill health or other reasons, your State Pension and other pensions you’re entitled to could be affected. It’s important that you understand all your options when it comes to taking pensions early to make sure you’ll have enough to live on in retirement.
Usually, you can start taking money from your pensions at the age of 60 or 65. This is when many people start to think about reducing their work hours and moving into retirement.
Early pension release means withdrawing money from your pension before the minimum age of 55 (57 from 2028). Unless you meet very specific criteria, you’ll be charged a substantial amount of tax and could risk losing all of your savings to scammers.
To help you understand whether you can draw your pension early and how doing so might affect how much money you get, we’ve put together this handy early retirement guide. We’ll outline what happens if you take your state pension early, as well as any private or workplace pensions.
Here’s everything you need to know:
Once you turn 55, you’ll be allowed to release money from your personal or workplace pension. After your 55th birthday, you can withdraw up to 25% of your pot tax-free, either as a lump sum or in smaller instalments adding up to 25%.
If you decide to wait until pension age, you’ll need to decide what to do with the remainder of your pension. There are four options to consider:
However, if you choose to draw your pension early, these options will differ. Read on to find out how taking pensions early can affect the amount of money you get for retirement.
Taking your pension before the age of 55 isn’t against the law, but it’s not usually recommended due to the large fees you’ll be charged. You could also risk running out of money before retirement and having to work for much longer than you’d planned.
There are a number of instances where you can claim your pension early, but you’ll need to meet very specific conditions to do so. For example, if you have poor health or a serious medical condition, you may qualify for ill health retirement and be able to take your pension early. If you’re below the age of 55 and have been given less than a year to live, you could be entitled to take your entire pension pot as a tax-free lump sum.
It may also be possible to get your pension early if you have a protected retirement date specified in your pension plan, outlining the age at which you can start to access your savings. However, this must have been granted before 6 April 2006 to be valid, and is only applicable to certain professions where early retirement is common, such as professional sports.
If none of these circumstances apply to you, HMRC will likely view your early pension release as unauthorised, and you’ll be charged up to 55% tax on the amount you withdraw.
As a result, any reputable pension provider will be highly unlikely to release your pension early, which means a third party would need to do it for you. To do so, they could charge you up to 30%, leaving you with just 15% of your overall pension pot. Usually, such firms aren’t authorised by the Financial Conduct Authority, which means you won’t be protected if something goes wrong.
This is where you have to watch out for pension scams!
There are numerous pension scams that will claim they can help you access your pension before you turn 55 by exploiting loopholes in the system. Unless you meet some of the criteria above, or have been explicitly informed by your pension provider that you qualify for early pension release, you should not trust a third party to act on your behalf.
Although you can retire at any age, you can only claim your State Pension when you reach State Pension age.
If you do choose to retire early, you will have to wait until you reach State Pension age to start accessing your savings. If you do this, you may receive less than you would have if you’d continued working.
This is because you get a State Pension by building up enough ‘qualifying years’. A qualifying year is a tax year where you have enough earnings on which you have paid National Insurance contributions (NICs). So, ultimately, the fewer years you have where you have made NICs, the less money you will have in your State Pension pot.
Retiring early will likely also affect your personal or company pension. The rules for personal and workplace pensions vary, depending on who provides them. To see how early retirement might affect you, you’ll need to check your personal or workplace pension.
Below are some things to think about when taking your pension early for different types of personal or workplace schemes:
If you’re a member of a personal pension, stakeholder pension or workplace money purchase scheme, the main points to remember are:
With a defined benefit pension scheme, the amount 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 are considering early retirement, you’ll likely receive a smaller pension.
Ill-health retirement is when you can access your pension early due to poor health. Sometimes, you might see this also referred to as medical retirement or retirement on medical grounds.
If you have a private or workplace pension, you may be able to start drawing an income and/or lump sum from your pension at any age due to ill health. In this case, the normal minimum retirement age of 55 does not apply.
However, it’s important that you check with your pension provider or scheme administrator as different pension schemes have different rules. Some pension schemes allow you to access your pension early if it looks like you won’t be able to return to your job as a result of physical or mental illness. Other schemes might require that you won’t be able to do any job, not just your own.
In cases of serious ill health, where your life expectancy is less than one year, you may be able to take all your pension as a tax-free lump sum.
To take early retirement due to ill health, you’ll need to provide supporting medical evidence. It’s also not possible to access your State Pension early due to ill health, but you might be entitled to some other state benefits, such as:
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