How does early retirement affect my pension

05 January 2017 - Posted by ebaxter

Essential facts

  • The normal minimum pension age is 55. This is usually the earliest that someone can access their pension without suffering a tax penalty.
  • Unless you have a ‘protected pension age’, accessing your pension pot before the age of 55 is a bad idea and will almost always cost you huge amounts through tax payments.
  • Taking your pension after 55 is a viable option. However, it is crucial that you assess your finances beforehand to see if you have sufficient finances.
  • Regardless of when you retire, you can only access your state pension at the ‘state pension age’. Follow this link to calculate your state pension age.

What is ‘early’ retirement?

Before we start to look at what it will mean for your pension to retire early, we should define what is meant by the ‘early retirement’.

The earliest that most pension schemes will allow you to access your pension pot without you suffering any tax penalties is 55. The normal minimum pension age (NMPA) is set by the Government and came into effect on 6 April, 2010. Prior to this, the age was set at 50. There are some circumstances in which you can retire at an earlier age, these include:

  • If you are suffering from ill health and cannot continue working.
  • If you are suffering from serious ill health and have been told by a doctor that you have less than 12 months to live.
  • If you have a protected pension age. See below to find out who is included in this category.

What is a protected pension age?

A protected pension age is one that guarantees that you are able to take you pension at a specified age, even if it is before you have reached 55.

Do I have a protected pension age?

The two main circumstances in which your pension age will be protected are when:

  • It is specifically stated by your scheme. On 5 April, 2006, you must have belonged to a defined contribution scheme or section 32 contract that allowed you to take retirement before 55 without suffering any extra tax penalties. The retirement age specified by your pension scheme will be your ‘protected pension age’.
  • You belonged to a prescribed occupation. On 6 April, 2006, you belonged to a personal pension scheme (a type of defined contribution scheme) or retirement annuities contract (a type of pension for the self-employed) and worked in a specific role that usually allows you to retire early. Examples include sports people, dancers and models. Click here for a full list of prescribed occupations.

In both cases, certain criteria have to be met before you are able to retire early with no penalties.

If it is specifically stated by your scheme, you must:

  • Have had the right from between 10 December 2003 and 5 April 2006 to access your pension before the age of 50.
  • Have an unqualified right, meaning you do not require consent from the scheme trustee or anyone else.
  • Belong to a scheme that included the right to take an early pension on 10 December 2003 or before.

If you belonged to a prescribed occupation, you must:

  • Have an unqualified right, meaning you do not require consent from the scheme trustee or anyone else.

Special note:

Some people with a protected pension age of below 50 who decide to take their pension may experience a reduction in their lifetime allowance (LTA). If this is applicable, your LTA will fall by 2.5% for each year that you access your pension before the NMPA. Speak to our experts to find out if this affects you.

Useful terms

Section 32 contract: A deferred annuity contract that has been purchased from a pension provider using the money from a pension scheme. Money is transferred from a defined contribution pension scheme into a new policy, which will then provide a regular income in the future.

6 April, 2006: On this date, known as A-Day, the Government announced a raft of new measures aimed at simplifying rules around pensions. The main change was that all pensions became subject to a single set of rules, including placing a ceiling on the amount of tax relief you can receive on contributions.

Lifetime allowance (LTA): The limit on the amount of pension you can draw without suffering extra tax charges. This can either be in the form of a retirement income or as a lump sum.

Taking your pension before 55

If you do not fall under any of the above categories then it is extremely unwise to access your pension before the age of 55.

55% tax bill

If you do so, you will be required to pay HMRC 55% of the amount taken. This will increase to 70% by way of a penalty if you fail to tell HMRC that you have accessed your pension before the NMPA.

As you can see, the consequences are serious. You will have to pay at least the bare minimum tax bill of 55% even if you:

  • Inform HMRC that you intend to pay the accessed amount back into your pension
  • Have spent all the money you withdrew
  • Were unaware that you were breaking any rules
  • Have already been charged an amount by the company that arranged the withdrawal

Beware of scams

You should be extremely wary of any company that contacts you and offers to arrange to access your funds before the age of 55. This will almost always be some kind of scam, or at the very least, very bad for your future finances.

Consider the following example:

Mr Smith is contacted and told that his entire pension pot of £100,000 can be released for a fee of 10%. Mr Smith agrees to this and pays the company who contacted him £10,000. He is then required to pay the taxman 55% of his pot — £55,000.

At the end of the process he is left with just £35,000 of the original £100,000 and no pension pot to fall back on in later life.

**Before agreeing to any early release pension scheme, it is vital that you speak to a qualified** and independent financial adviser.

Taking your pension at 55

You will face no undue tax penalties if you decide to take your pension at the earliest possible opportunity (for most people this is 55). However, there are financial implications to take into consideration.

Drawbacks of taking retirement early:

  • Reduced pension.
    • For defined contribution schemes, the amount paid in by both you and your employee will be less if you retire early. This will mean that your pension pot will be smaller than if you had worked for longer.
    • For defined benefit schemes, the amount you receive is usually worked out according to a number of factors, one being length of service, which may be shorter if you retire earlier.
  • No access to state pension until you reach the state pension age.
  • No state pension right away. If you retire at 55 you will face a gap of around 10 years before you can collect your state pension.

How will early retirement affect my state pension?

You can only collect your state pension when you reach state pension age. This age has changed over the years and is usually different for men and women.

To find out your state pension age, click here.

The state pension you receive is usually tied to how many ‘qualifying years’ you have worked. These are years in which you have earned enough to pay the required amount of National Insurance contributions (NICs).

Paying extra National Insurance contributions (NICs)

If, for one reason or another, you have had years when you have missed some National Insurance contributions, you may be able to pay extra voluntary contributions.

To find out more, talk to our financial advisors.

Reasons to take early retirement

There are a number of reasons why you might consider early retirement. These can include:

  • Wanting more free time. Many people will sympathise with this reason. Maybe you want to turn the passion you have for a hobby into an on-going business concern, or you simply wish to expand your horizons by travelling the world. Just make sure you don’t leave yourself short of cash.
  • Sometimes things happen that are beyond your control. Many people facing this situation who have been saving into a pension for most of their life will choose early retirement, especially if a large redundancy settlement makes this economically viable.
  • Tired of your job. Most of us have felt like leaving our job at some point. If you have sufficient funds to do so, maybe it’s the right time for you.
  • Poor health. You may be been forced to leave full-time employment due to the onset of a debilitating illness. Sometimes in these circumstances you can access your benefits early, possibly before the minimum retirement age of 55. Make sure you check with your pension scheme before taking any action.
  • Becoming a carer. It could be that your spouse or partner now finds it just too difficult to be on their own. Alternatively, you may be required to help with your new grandchild. Either way, the opportunity to take early retirement could come as great relief.

Can I access my pension pot without actually retiring?

You do not have to retire to access your pension pot. Some people use their pension pot to boost their earnings from work, allowing them to afford a few more luxuries in later life. Some people use the money they have saved in their pension to cut back on the hours they work. This means they can stay in employment while having enough free time to pursue other interests.

What do I do now?

If you need information or advice, contact us and one of the team will be happy to answer any questions you may have.