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Choosing Your Pension Age

Richard Beardsworth Pension Expert

By Richard Beardsworth.

Independent Financial Advisor

More Reading on Pensions...

You spend your whole life working and putting away money for retirement. When that day comes, you expect to be able to begin drawing from your private pension pot while also receiving state pension payments as well. The question is, what is the right age for retirement? For all intents and purposes, we will refer to this age as the 'pension age' – as opposed to the 'state pension age' – throughout this guide.

The pension age was not something most people worried about prior to the implementation of pension reform in 2015. Why? Because it was relatively difficult to access a private pension without significant tax liabilities before reaching state pension age. As such, most people investing in a private pension simply left the money alone until the age of 60 (women) or 65 (men). Things are now different. Beginning at the age of 55 you can access a private pension as follows:

  • Take the entire pot as a lump sum payment
  • Take a portion of the pot has a lump sum payment
  • Transfer your pot to a different scheme
  • Enter a drawdown contract
  • Use your pension pot like a bank account
  • Purchase a standard or deferred annuity
  • Take advantage of trivial commutation.

All of these options are subject to the 25/75 taxation rule. The first 25% of funds withdrawn from a private pension are received tax-free; the remaining 75% is added to other sources of income in the year it is received and taxed accordingly. The benefit of accessing one of these options in terms of pension age should be clear: you get to decide when you want to retire. If you are ready to stop working at the age of 55, you can do so. Conversely, you can keep working until 65 or beyond.

Changing State Pension Age

We cannot effectively talk about choosing your pension age without also mentioning the changing state pension age. Under the system we are all familiar with, the state pension age is 60 for women and 65 for men. It has been that way since 1995. However, beginning in 2016 the ages for men and women will slowly increase. By 2018, it will be 65 for both men and women; by 2019 the state pension age will be 66. Those born on or after 1961 will not reach state pension age until 67.

All this is to say that the state pension age is increasing in order to encourage people to work longer and collect less in total state pension payments. But if you have a private pension, either workplace or personal, you can still retire when you decide you have enough money, as long as you wait until the age of 55 at a minimum.

Deciding on Your Pension Age

Determining when you officially retire is not a decision that can be made easily or taken lightly. You obviously have to consider numerous factors. For example, how much money have you put aside in relation to what you believe your retirement budget will be? You cannot possibly know when it is even feasible to retire if you don't have a good handle on how much your pension is worth.It should be clear that money will be your first determining factor. It helps to sit down with a certified financial advisor or a financial expert working with a local charity to help you figure out your finances. Before you can retire, you must understand:

  • your annual budget for day-to-day expenses
  • your total debt load AND how much it costs to service
  • your expected retirement income (all sources)
  • future planned expenses (minor and major)
  • any plans to leave money to your survivors.

Planning to retire essentially requires you to put together a basic financial blueprint for how you meet your obligations after you stop working. Consider it a long-range budget as opposed to the routine budget you use to manage your day-to-day expenses. In addition to this budget, you also need to consider things such as:

  • Pension Value – How much money actually sits in your pension pot is an important factor in your pension age decision. If you already have enough to comfortably live on for the next 20 to 25 years, you have little to be concerned about. Otherwise, you may have to be very careful about how much you withdraw.
  • Earning Potential – Some people make retiring at 55 possible by withdrawing a portion of their pension pots and using the money to either start a small business or invest in a high return opportunity. By earning more than what their pension earns, through an outside source, they increase the amount of money they have to retire with.
  • General Health – Ideally you would continue working for as long as you want to. But that may not be possible if you are in declining health. In such cases, it may be a good idea to retire at the age of 55 in order to enjoy as many of your remaining years as possible. In some cases, ill health will even allow you to access your pension prior to age 55 without penalties.
  • Other Activities – There are those who retire long before state pension age because they want the opportunity to engage in other activities. For example, a private physician may retire at the age of 58 so that he can donate his time and expertise to a medical charity. A business manager may retire at 60 so that she and her husband can travel while they are still relatively healthy.
  • Children and Grandchildren – Lastly, your children and grandchildren may play a role in helping you determine your ideal pension age. On the one hand, you may want to work as long as possible in order to be able to set aside some money you can pass along to them. On the other hand, a desire to spend more time with them may dictate an earlier retirement.

The long and short of it is this: pension freedom now makes it possible for you to choose your own pension age. You do not have to keep working until age 66 or 67 because you are afraid of penalties you might incur for withdrawing your pension earlier. Those penalties no longer exist.

A Few Cautions to Remember

Before we close this guide to determining your pension age, there are a few cautions to both consider and remember. First, members of defined benefit (final salary) pension schemes do not have access to the same freedoms afforded their defined contribution counterparts. If you are among them, you may have to transfer your current pension to a new defined contribution scheme in order to have access to your money before state pension age. This could be a costly proposition, so be cautious.

Second, you have the option of retiring at any point after the age of 55 without being penalised for accessing your pension pot. But doing so is not necessarily a good idea. Be careful that your desire to stop working does not lead to running out of money before you die. Once the money is gone, you will be relying entirely on the state pension to pay your bills.

Third, you may choose to retire overseas at any point after age 55. Such a decision would likely mean transferring your current pension into a QROPS in order to reduce your tax burden. But analyse any plans very, very carefully. Some countries you might choose to relocate to may have a higher cost and standard of living than what we know here in the UK. A pot substantial enough to let you retire here may not be enough to support you as an expatriate.

So what is your ideal pension age? Only you know the answer to that question. The good news is that you are no longer locked into what government bureaucrats say. You can choose your pension age from age 55 onward.

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