This section looks at the facts about retiring early, early retirement incentives offered by employers and your pension options.

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1 Early Retirement Employers may offer an early retirement package to avoid compulsory redundancies. If you are tempted by this, you should think carefully about how you will manage financially if you give up work and what you will do in the future.

2 Early Retirement This section looks at the facts about retiring early, early retirement incentives offered by employers and your pension options. Early retirement basics The earliest age at which you can start drawing an occupational or personal pension is 55. However, most occupational pension schemes have a higher normal pension age of 65. Usually your occupational pension will be lower if you start to draw it early, but may be enhanced in redundancy situations. The earlier you draw a personal pension, the lower it will be. You cannot get your state pension before age 65 if you are a man or shortly after 60 if you are a woman. The state pension age for women is gradually increasing to 65 for women reaching state pension age by April In future, the state pension age for both men and women is set to increase in stages to 66, 67 and then 68 and the government is consulting on when these changes should happen.

3 Early retirement packages Taking early retirement is very different from being made redundant: you have no redundancy rights and do not receive any redundancy pay. If you decide to retire early, you are likely to receive a smaller pension than if you had worked until your normal retirement age. Just how much your pension will be affected will depend on the terms of your early retirement package and the type of pension scheme you are in. Early retirement packages are likely to include incentives, such as: If you are in a defined contribution scheme (see below), a lump-sum payment into your pension fund to boost the value of your fund. If you are in a defined benefit scheme (see below) your employer may offer you a pension which includes benefits worked out as if you had worked up until normal pension age. Both of these incentives would result in you getting a better pension than you would otherwise be entitled to if you took early retirement without the package. Different types of pension scheme There are two different types of work-based pension schemes: Defined contribution scheme (also called a money purchase scheme). You build up your own pot of savings your pension fund. The size of your fund depends on how much is paid in, how (and whether) the invested contributions grow, and charges. At retirement you can shop around to buy the best pension with your fund (see later in this section). All personal pension schemes work on a defined contribution basis. Defined benefit scheme (also called a final salary scheme). Your pension is usually based on your salary and the length of time you have been in the scheme. For example, your scheme may pay one-sixtieth of your pre-retirement pay for each year: if you earned 30,000 and had been in the scheme 20 years, you would get 1/60 x 30,000 x 20 = 10,000 a year pension. Other defined benefit schemes work out your pension in different ways. If you are not sure how your scheme works, contact your pension scheme administrator.

4 Work-based defined contribution schemes A defined contribution scheme that you belong to through work may be an occupational pension scheme which is a benefit that comes with your job. Alternatively, it may be a group personal pension scheme or a stakeholder scheme although your employer has set up this pension arrangement, the scheme is personal to you and stays with you even when your job ends. In either case, early retirement will normally result in you receiving a smaller pension because: You will have had fewer years to pay into your pension scheme so your pension fund will be smaller. Your pension fund will have had less time to grow. The yearly pension you can buy with your fund is lower the younger you are at the time of purchase. However, just how much your pension will be affected will depend on the terms of any early retirement package that your employer offers. Example Suppose a man started paying into his pension when he was 35, expecting to retire at 65, but then retired instead at 55: Instead of paying contributions for 30 years, he will have paid them for just 20 years. In addition, his fund will have had only 20 rather than 30 years to grow. At age 65, each 10,000 of his pension fund could have bought a level pension of 636 a year. But at age 55, each 10,000 of fund buys only 516 a year.* * Based on annuity rates from CFEB Moneymadeclear comparison tables, June 2010.

5 If you are interested in taking up an early retirement package, ask your employer for an illustration of the pension you would get. Work-based final salary schemes If you are in an occupational final salary scheme, retiring early is likely to result in you getting a smaller pension because: The pension formula is based on fewer years in the scheme than if you had worked on until normal pension age. The pension formula may be adjusted (called an actuarial reduction ) to reflect the extra cost of paying your pension for longer and based on fewer contributions. Typically, the pension might be decreased by 3 to 6 per cent for each year you retire early. But in some schemes, there is no reduction for, say, the last five years before normal pension age. In a redundancy situation, your employer might waive any actuarial reduction and possibly work out your pension as if you had worked until normal pension age. Example If you started paying into your pension when you were 35 and your pension is based on 1/60 of your final salary, then: Retiring at 65 would give you 30/60 (in other words, half) of your final salary. Retiring at 55 would give you 20/60 (one-third) of your final salary. Your pension might be reduced further by an actuarial reduction of, say, 5 per cent for the years from 55 to 60, in other words 5 x 5% (100) = 25 per cent. Combining these effects your pension would be one-quarter of your final salary before any redundancy package. Bridging pensions If you take early retirement you may have to wait some years before you receive your state pension. To help employees retire early, some companies offer a bridging pension as part of the early retirement package. This is an additional pension which you receive from the time you retire until your state pension kicks in. Once you reach state pension age, your employer stops paying the bridging pension but your income should remain steady as you will then receive state pension instead.

6 Your pension options If you take early retirement, you need to decide what to do with your pension fund. Usually you can take up to a quarter of the fund as a tax-free lump sum. The remainder of the fund must be taken as pension income, which is taxable. Taking a lump sum reduces the pension you get. In a money purchase scheme, the trade-off is neutral so taking the maximum lump sum would reduce your pension by a quarter. But, in most final salary schemes, you would get a worse deal and would have to give up more than a quarter of your pension, so think carefully before you decide what to do. Occupational pension schemes often offer you a pension paid direct from the scheme. You do not have to accept this, but can shop around for a better pension from elsewhere (called using your open market option ). In general, it is hard to beat a final salary pension, so you will normally be better off accepting what the scheme offers. If you are in a money purchase scheme, you have a choice of ways to provide your pension and you may do better shopping around than accepting the scheme pension. Your main choices are: Buy a lifetime annuity. This is an investment where you exchange your pension fund for a pension payable for life, regardless of how long you live. Most people choose this option. Your employer s scheme usually offers you this type of pension or you can buy an annuity from another provider annuities are sold by insurance companies. Choose income withdrawal. This is where you leave your pension fund invested and draw an income direct from the fund. Employer s schemes do not usually offer this option, but check with your scheme. If it doesn t, you would need to transfer to a personal pension scheme that does allow this option. Income withdrawal is suitable only if you have a large pension fund and are comfortable with a pension which may go up and down. It is a complex choice get advice from an independent financial adviser.

7 Enhanced and impaired life annuities Some companies offer annuities that pay a higher than normal income if your life expectancy is lower than usual. You might qualify for an enhanced annuity if you smoke or you are overweight. You might get an impaired life annuity if you have a health problem that threatens to reduce your lifespan. If you think you might qualify for a higher than normal income, shop around to find a provider specialising in this type of annuity. Lifetime annuity There is more than one type of annuity to choose from see the table overleaf. The type which is best for you will depend on your circumstances. If you have access to the internet, you can use The Pensions Advisory Service s online annuity planner to help you choose a suitable type of annuity. Annuity rates are based on the size of your pension fund and the annuity rate offered by the annuity provider. Annuity rates are based on factors such as general life expectancy, interest rates, your age, sex and sometimes your health. In general, the older you are the higher the annuity rate you are likely to get because your life expectancy is less. But annuity rates fluctuate (and have tended to fall over the last 20 years) so there is no guarantee that putting off the start of your pension to a later age will result in a higher pension. Example Jamil is 59, a non-smoker and has 100,000 to invest in an annuity. He wants a joint-life-last-survivor annuity so that if he dies before his wife (who is three years younger than him), she will carry on receiving half his annuity income until her death. He chooses an annuity which has no guarantees but which will increase each year in line with the rate of inflation (RPI). The best rate he is offered is 2,868 a year which is around one-fifth less than the 3,216 he would have been offered if he were 65. **Figures from CFEB Moneymadeclear comparison tables, June 2010.

8 Common types of annuity NO Do you need a pension for a partner as well as yourself? YES Choose a single-life annuity. This pays out until you die. Choose a joint-life-lastsurvivor annuity. This pays out until the last of you and your partner die. NO Are you worried an annuity will be poor value if you die soon? YES Consider, for example, an annuity with a guarantee. It pays the promised income for a set number of years say, five or 10 even if you die before then (your heirs receive the income). Example (single) [1,2]: 624 Example (joint) [1,2,3]: 552 NO Do you want an income that increases each year? YES YES Consider a level annuity. It pays a fixed amount of income each year. single [1]: 636 joint [1,3]: 552 Consider an escalating annuity. It increases by a fixed amount each year. single [1]: 444 joint [1,3]: 372 Consider an RPIlinked annuity. It increases each year in line with inflation (and may fall if prices fall deflation). single [1]: 384 joint [1,3]: 312 [1] Rates from CFEB Moneymadeclear Compare Products, 23 June Amount per year for each 10,000 of pension fund for a man aged 65, non-smoker, no guarantee unless stated otherwise. Escalating annuity increases by 3 per cent a year. For escalating and RPI-linked annuities, starting income shown. [2] 10-year guarantee period. [3] Female partner, two years younger, income falls by one-third on first death.

9 Shop around The pension deal you find now will affect the income you get for the rest of your life. You are strongly recommended to check what other providers offer the CFEB Moneymadeclear comparison tables can help you do this (see Useful Contacts).

10 Pensions and work Normally, you can start an occupational pension early and it is not affected if you carry on or return to work. The exception is where your pension starts early or is enhanced on the grounds of ill health in that case, the pension may stop if you find later you are well enough to resume work. Phased retirement Many people like to wind down to retirement before giving up work altogether. There is nothing to stop you taking your employer s early retirement deal and then looking for another job, perhaps a parttime post. If you transfer your pension fund out of your employer s scheme and into a personal pension scheme, instead of using all your pension fund to buy an annuity, you can use just part of it to buy an annuity now and leave the rest of the fund to carry on building up. You can later use another portion of your fund to buy another annuity. This is known as phased retirement. Each time you use part of your fund to buy an annuity, you can also take up to a quarter of that part as tax-free cash. For example, if you bought an annuity once a year, you could use the annuity plus the taxfree cash to provide your income. Bear in mind that the minimum purchase price for an annuity is often 10,000. Returning to work There is nothing to stop you from retiring and drawing your pension and then returning to work. But you should consider your tax position, particularly if you receive a good pension and are thinking of taking on a full-time job. You could find this extra income tips you into a higher-rate tax band. Tax and benefits If you decide to return to work after receiving your pension, any income-related benefits you receive such as pension credit are likely to be affected. Your local Jobcentre Plus (Jobs and Benefits Office in Northern Ireland) or a benefits adviser (see Useful Contacts) can tell you how any extra income from working may affect your entitlements. Similarly, adding earnings to your pension and other income will normally increase your tax bill and could take you into a higher tax band.