Before thinking about retiring early, make sure that you are aware how early retirement will affect your state pension and the other types of pensions you are entitled to. Some people choose to retire early while others are forced to early retirement due to redundancy or incapacity. Various pension options, such as pensions transfer, can help you achieve your goals of retiring early while having enough to live on in retirement.
Retirement age for claiming state pension
While you can stop working whenever you like, be aware that you can only claim your state pension when you reach the established State Pension age. State pension age can vary depending on when you were born and your gender. The state pension age for Men who were born on or before 5 April 1950 is 65, while state pension age for women born during that time is 60. For women born on or after 6 April 1950, the state pension age will increase from 60 to 65 between 2010 and 2020. Between 2024 and 2046, the state pension age will increase from age 65 to 68 for both men and women. At this point in time, the earliest age where one can receive personal or company pension is 50 years old, but this will depend on the individual’s pension scheme rule and will increase to 55 from 2010. Those who are suffering from a serious illness and have a life expectancy of less than a year, they are eligible to retire at any age and claim 100% of their pension fund as a tax-free lump sum. However, if the same individual is married or has a civil partner, 50 percent of their pension fund has to be retained to provide for the surviving partner as transfer pension.
Consider the qualifying years
If you choose to retire before the applicable state pension age, you will not receive your state pension right away until you reach the specified age. Also, you may receive less than if you had continued working until your pension age. Your basic state pension will depend on the ‘qualifying years’ that you have built up. A qualifying year is defined as a tax year where you have made National Insurance Contributions (NICs) through sufficient earnings. If you retire early, you will have fewer qualifying years. However, you can choose to boost your NIC contributions so that you can retire earlier.
Boosting your NIC contributions
If you are under 60, you can boost your NIC record by paying voluntary NICs. You can also take on part-time or casual work where you pay NICs. This may add to your NIC record. For males over 60, they are entitled to NIC credits until they reach the age of 65.
Taking personal or company pension
If you have personal or company pension, you’ll have to check with your company or your personal or stakeholder pension scheme if they provide options for early retirement. The rules depend on the scheme whether you can retire early and how early you can retire. Most schemes allow for early retirement in cases of ill-health where you are unable to carry out your job because of a mental or physical impairment.
Transferring your pension
To be able to retire earlier, you may also want to transfer your pension to get the best possible returns on investment available. UK pension transfer is the process of changing or switching the value of your contributions from one pension scheme to another. People opt to transfer their pension when their current pension is not working hard for them and there are better investments offered in the market. Understanding how you can benefit from a transfer of pension can be complicated and you will need a professional financial adviser to help you assess your situation. There are different reasons for transferring and different situations where transferring to another scheme may prove beneficial. Some of the common reasons for transferring are when your existing company scheme is being wound up, when your personal pension has high fees and you want to transfer to a scheme that offers lower fees for the same benefits, and when you want to add your existing personal pension to an occupational pension scheme so that you can benefit from employer contributions and lower fees. Whatever your reason for transferring, make sure that you seek the help of an independent financial adviser who is a pension transfer specialists so that you can explore the options available. Independent financial advisers or IFAs are required by the Financial Services Authority to give impartial advice based on your circumstances. They are not supposed to sell a policy to you or have a bias to certain companies. They should understand your situation and your current pension scheme, as well as the new pension schemes available to assess whether you will actually benefit from a transfer or you will just end up losing out. The IFA will also suggest a suitable pension scheme or product, should you need one; but you are not obliged to transfer if you do not want to.
Two basic types of pension
Before transferring your pension, you need to know the type of pension you have and what scheme you can transfer to. Take note that the pension transfer value is calculated differently depending on the type. The two basic types of pension include Final Salary Pension Schemes and Money Purchase Pension Schemes. For final salary schemes, you are guaranteed a pension that is a fixed percentage of the salary you have when you leave the company (or your final salary). Regardless of how much your contributions are worth, the benefit you will receive is already fixed in advance (thus it is also known as Defined Benefit pensions). Money purchase schemes depend on how much your contributions are worth. When you retire, the total value of your contributions will be calculated and the money is used to purchase an annuity, giving you a guaranteed income for the rest of your life.
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