Can I Take My Pension Early?
Updated: Sep 19
If you’re like many people, the day you retire will feel like a milestone in your life. Not only will it mark the beginning of your retirement, but it will also mark the end of your full-time job and all the stress that comes with it.
If you’re currently dreading your job, you might be considering taking your pension early, before reaching normal retirement age (65) in order to accelerate the date you get to relax and live your dream lifestyle. But can you really take your pension early?
In short, although you can take your pension early in some circumstances, it is oftentimes not the right decision to make, especially if you plan to take your pension before the legal minimum retirement age of 55.
What Happens If You Want To Retire Before 55
The only categories of people who can retire and take a registered pension before 55 are certain classes of sports person, certain service industries, and those who are seriously and terminally ill.
If anyone else attempts to withdraw their pensions before 55, they will incur significant tax penalties for doing so.
However, that doesn't necessarily mean you can't retire before 55.
If you have alternative income streams such as passive income from investments, like stocks and shares, or online income streams from online businesses, then you can “retire” before 55, and fund your existence on these alternative incomes before you ultimately take your pension.
What Happens If You Retire After 55
Although it’s possible to begin drawing from a pension at age 55, soon to increase to 57, there are some potential drawbacks.
If you retire too early, your income maybe significantly reduced. Why? Under a DB scheme, those payments are based on average earnings throughout your career.
With your five highest earning years usually at the end of your career, this could make a significant impact to your monthly income.
It should also be noted that some defined benefit schemes (DB) do not permit you to retire at 55 and you may have to wait until 58 or 60.
Defined contribution schemes or DC schemes do allow you to retire at 55, but you must ensure there is enough in them to be able to live on.
For example, if you had a £500,000 pension pot, you could either earn say 4% on that £500k, which equals £20,000 before tax.
Or alternatively you could take 25% tax free which would be £125,000, and then earn 4% or so on the remaining £375k as an income of £15,000 per year pre tax.
What Happens if you are Ill
It may be tempting to take your pension as soon as you are eligible, but if you are ill it is important to know what happens if you take it early.
Can your pension be taken away from you or can your payments be reduced in any way if you have an illness? What Happens if You Are Terminally Ill.
These questions need to be answered by your pension trustees if this situation arises, as they are specific to each and every pension scheme in slightly different ways.
More generally though, if you are terminally ill and you can prove this with a doctor's note, you can usually draw your pension down in full on an emergency basis.
If your illness is not terminal and is something of a longer duration, then you are unlikely to be able to tap into your pension until the normal retirement age.
Knowing what could happen with your pension and how to plan for it if you are ill will ensure that there are no nasty surprises when taking money out of your pension fund early due to sickness.
Must You Stick With Your Current Employer?
The short answer is no. Your benefits are portable, meaning they follow you from job to job. This is one of those great aspects of employment—if you’re unhappy in your current position and have put in time, you have a right to leave and look for greener pastures elsewhere, whilst your pension continues to belong to you.
Is There Any Reason to Wait Until Age 65?
Contrary to popular belief, you don’t have to wait until you’re 65 to begin collecting your pension. If you begin receiving benefits early, however, that may affect your monthly payments later in life.
Before taking any action, it’s important to understand how early benefits will impact your lifetime income stream and lifestyle.
For example, some people choose to retire at a later age than 65 years old on the basis that it will provide a greater income for future years the longer you leave it invested. This also applies to delaying your state pension benefits.
Can I Take My Pension Early - The Bottom Line
Yes, you can take your pension early, but as noted above there can be a cost of doing so.
Firstly, any pension income you receive early is likely to be far lower than what it would have been had you left your pension either invested, or with the state for a further five years.
This is because your pension pot has either less time to grow via investments, or by taking your pension five years early, your provider has calculated that it will have to pay you for five years longer, and has therefore reduced the overall payment to make up for the additional payments it thinks it will have to make.
So in short, whilst you can take your pension early, you should ensure you know what the cost of doing so will be.