Taking pension early

If you are aged 55 or over taking pension early may be possible if you have a relevant private or company UK pension. Taking pension early allows you to release the benefits held within your pension before your retirement date should the need arise.

All pensions in the UK are designed to be long term tax efficient saving vehicles that provide you with an income in your retirement when you are no longer working. They do this by providing you with tax relief on the contributions you make into the pension which is invested in order to grow throughout your life until your reach retirement (or at least aged 55).

When you reach 55, taking pension early allows you to access these benefits, such as up to 25% of your pension funds as a tax free cash lump sum.

You do not need to take all 25% of your fund as a tax free cash lump sum when taking early pension (or indeed when you retire) you may instead take a portion of your fund such as 5% or 10% of the fund and leave the remaining percentage reinvested.

Once you have taken that amount after taking pension early, you must then either reinvest the residual amount or begin taking an income from it. Should you reinvest it, you will most likely switch the pension to a new provider that the financial advisor feels is better suited to your needs where it will then continue to grow until such a time that you need an income.

If however when taking pension early you require an income in addition to the tax free lump sum you may either purchase an annuity with the fund or take a direct income from your pension fund itself using income drawdown.

The main difference between these types of income is that an annuity is generally seen as more secure in that it pays out for life from a life insurance company and the amount does not vary, whereas income drawdown is paid directly out of your pension providing you more control and flexibility over the amount you wish to take and your pension fund as a whole. In addition with income drawdown your fund remains yours, and can be passed down to beneficiaries on your death. However, it is possible that if you take income drawdown and the pension does not grow as expected you may use up your pension fund total before your need for an income ends.

You should note that taking pension early is however, not possible for State pensions or pensions that you have already drawn your benefits from.

Note: Releasing your pension benefits early could reduce your income at retirement and therefore is only suitable for a limited number of people and circumstances. The above is based on our understanding of current legislation and tax rules and are subject to change by the government. Tax reliefs referred to are those currently applying. Please note the value of investments can go down in value as well as up and you may get back less than you invest.