Choose When to Start Your Retirement

November 2018
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It is a common mistake to assume that pensions can only be drawn from the fixed date chosen at the outset. While the State Pension age for each person is set by the Government, ranging from age 65 to 68, depending upon when born, other pensions can be accessed more flexibly, once over age 55, or sooner, if in severe ill health. It is not always necessary to wait until reaching the age originally chosen.

Since 2006 it has been illegal for employers to require someone to retire from their job just because they reach a given age. This opens up the possibility of a longer working life for those who love their job or need to work longer for financial reasons. For others, accessing some pensions early, can facilitate a transition to part time or less demanding roles, creating a glide path into retirement.

Here is a quick guide to the things to consider, when deciding when and how to access pensions, at a time to suit you.

State Pension

From now on this will be payable from age 65 for both men and women. For those born after April 1954 the State retirement age will gradually increase to 68. It is not possible to request early payment of the State Pension, but it can be delayed. To delay payment you need do nothing, as the State Pension only starts once it is applied for. If entitled to State Pension before 5 April 2016, the increase in pension for late payment is a generous 10.4% per year, with 1% added for every 5 weeks it is deferred. If State Pension age is reached after 6 April 2016, the increase is 5.8% per year.

In both cases the extra pension earned can either be added to the weekly amount paid for life or taken as a cash sum when the pension payments start. In both cases the amount paid is taxable income.

Defined Benefit Pensions

These are sponsored by employers and promise an annual income paid for life from the scheme retirement age. Also known as final salary schemes, the amount of income and when it is payable is set out in the scheme rules. The statement of benefits issued by the scheme should say when this is. Many schemes will allow members over 55 to take their benefits earlier or later than the scheme retirement age. If the pension is requested earlier the annual amount is reduced to compensate the scheme for paying the income for a longer period. Conversely late retirement may earn an increase in the annual income offered.

If the scheme rules allow early or late retirement, a member may request a quotation from the trustees of the scheme to see what the offer would be, before committing to accept the revised pension.

Private Pensions

For most private pensions, age 55 is the earliest point at which payments can be drawn out of the plan. Usually up to 25% may be drawn as a tax free lump sum and the balance as a taxable income. It can be drawn directly from the fund or used to secure a lifetime guaranteed income. With this type of pension it is important to consider the impact of early withdrawals on future lifetime income. Once the fund has been spent, it cannot provide for future income.

Some older plans, especially those called buyout plans or retirement annuity contracts, may contain valuable guarantees. Often these are payable from a given age and the extra tax free cash or income they offer, could be lost, if taken earlier or later than the specified date.

Some older plans have to be converted to cash and income by age 75. If there is no need to do so, switching into a more modern plan, which allows investment beyond 75, may be appropriate. This can apply, if planning to retain the fund for later life, or to leave the fund to loved ones, free of inheritance tax.

Under 55 Exceptions

Special rules apply to those in serious ill health. Anyone facing this should seek professional advice as soon as possible, as the financial consequences of doing nothing can be significant.

Professional sports people can also access their pensions sooner, along with members of the Armed Forces and other frontline emergency service workers.

Have a Plan

When approaching retirement, having a plan, which takes account of living standards desired, expected longevity and the needs of dependants, will help identify the optimum time to access pensions and savings to create your tomorrow.

Kay Ingram
Director of Public Policy, LEBC

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances, please contact an adviser. All information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation, are subject to change. Taxation advice is not regulated by the FCA.

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