When can you take your pension? This was a question I was asked by a client this week as we met for a review and were plotting their retirement plan.
Like most things in finance the answer is not straight forward. But knowing when and how you can take your pension is crucial when it comes to deciding at what point you may wish to retire.
Understanding your pension
The first step is to understand what type of pension you have.
The government State Pension has a State Pension Age (SPA) which was always age 65 for men and 60 for women for some time, until they started fiddling with the rules back in 2010.
There cannot be seen to be any discrimination by gender any more and therefore the SPA for men and women is equalising and then increasing in stages to 66, 67 and eventually 68. You can find out your exact age by using the government’s SPA website here.
Defined Benefit Pension
Sometimes known as a Final Salary pension. These pensions can be found mainly in the public sector like the NHS Pension Scheme but there are also some available in the private sector, especially large companies.
With these types of pensions there will usually be what’s called a ‘Normal Retirement Age’ NRA built into the pension. Typically this will be 65 or if the scheme is more generous, 60.
It’s crucial to find out your NRA.
It’s easy to think that this is the only date at which you can take your pension, however this date is an anchor. For the majority of defined benefit pension schemes you can actually take your pension from age 55.
However for defined benefit pensions, by doing this you will see the income paid severely reduced the earlier you take your pension before NRA. This is because the pension must be paid for longer.
You also need to consider if you plan to still work with the same employer as by taking your pension early you will be leaving the scheme and giving up future benefits.
You could of course delay taking the pension past the NRA and benefit from a higher income at the time you do eventually take it. Perhaps you are still working and don’t want to pay the extra tax. However, an assessment needs to be made here about how long it will take for you to recover the income you would have gotten had you taken the pension at NRA.
Defined Contribution Pension
This is the much more modern style of pension that you can either set up yourself or will be offered by private sector employers nowadays.
With this type of pension you build up a pot of money through contributions you and your employer make together with investment returns.
Some of these types of pension will still state a NRA but it is pretty much irrelevant (unless an older scheme – pre 2000s). You can take this type of pension anytime from 55 or never touch it at all.
The earlier you take it the more chance it will run out sooner.
Taking your pension earlier than you originally planned could be essential in ensuring you retire when you want to rather than working longer than you thought you had to.
But there are many pros and cons regardless of which type of pension you have.
Proper financial advice is essential.
- We are living longer and therefore retirement will be longer.
- Business is far more competitive these days meaning the right investment strategy is essential for long term returns.
- Pension withdrawals are taxable so it’s important you understand your net position.
- Death benefits can be different depending on what type of pension you have.
We use sophisticated software to map out your financial plan projecting your income and expenditure well into the future. We then stress test it against all sorts of potential scenarios. This allows you to find out where you stand and what you need to do.
Why not get in touch for a no obligation initial consultation at our expense. We can demo the software and start to explore when taking your pension is right for you.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.