Have you wondered when you could get access to your pension? Or if it’s possible to get your pension earlier than your initial life plan?
You might be so tired of working, and you might want to retire as early as possible. However, it’s good to know more about your financial situation before doing so. For example, consider how much you’ll receive monthly and think if that would be sufficient for you. In other words; can you afford early retirement, or do you still need to work a few more years?
Does it make sense financially to retire early? Here are five questions you need to ask yourself:
1. What Rules Are There When Retiring Early?
It’s your choice when you start or stop working. However, when it comes to your pension, you don’t have a say. Meaning, you’ll only gain access to your pension funds once you turn 55, and not a moment before then. Good news is that new rules were set up in 2015, which allow pension savers to control their money more than they could in the past.
Nevertheless, you can withdraw funds from your workplace pension pot. As a lump sum of your entire pension, as an annuity or as income drawdown if you want to keep some money invested. Best of all, it doesn’t matter which option you go with; it’ll always be tax-free with your first 25% withdrawal. Currently, the minimum age to withdraw is 55, but this might become 57 in the year 2028.
2. Can I Access My State Pension At Any Time?
State Pensions are different than workplace pensions. You can’t access them before 65, even if you retire earlier. The State Pension age is 66; it will be 67 in the year 2028.
A prerequisite of any State Pension is to have a National Insurance record of a minimum of ten years. This will become 35 if you want your full State Pension. If you want to know whether or not you qualify for your State Pension, go to gov.uk.
3. Will It Be Benefit Me To Retire Early?
Retiring early has its pros: a slower pace, more time for hobbies, and seeing your friends and family more regularly. If you’re a grandparent, your grandkids will be visiting more of you as well! Travelling to your dream destinations is more possible. You might even pick up a new hobby or go on a memorable adventure.
When you take your pension early, there are some cash rewards. If you choose to take your lump sum first (which will be tax-free), you can buy or do whatever you want to. You could either pay off a mortgage, renovate your house or assist your children.
4. What Should I Consider About Early Retirement?
In the end, your quality of life is essential and should be significantly considered. Especially when it comes to taking your pension early, withdrawing funds from your pension pot early has its perks, but always think about the long-term effects on your life.
Let’s dig a little deeper:
Science confirmed that humans live longer than they did years ago. So that’s a marvellous thing!. 65-year-olds can expect to live 22.8 years longer, a study in 2017 found. On the flip side, your pension will also need to live 22.8 years longer.
If you retire early, you might not have saved up sufficient money to last you longer. This means a smaller pension pot for your future. If you cash in most of your pension early, you could face pension shortfall.
The bottom line is:
Planning is key. You’ll need a few years to plan for your retirement, and there are steps you’ll need to follow. In some people’s case, gradual retirement (retiring in phases) is a good compromise. Then you can decrease your work gradually and steadily, but get paid for longer. Your pension pot will also grow more in this instance.
5. Is It A Good Idea To Take My Pension Early?
Before you leave your career behind, you must know the size of your savings. There is a pension calculator which works out your pension income for you, as well as your annual retirement pay-outs.
Retiring at 55, with your desired income of £25,000 per year, as well as your age and savings can be put into the pension calculator. You’ll be told how much to save every month from reaching your pension income goal. Sometimes, the level of pension payments you’ll need to make it a bit too much for you, put in higher retirement age. You can play with different amounts and ages to see what you need to reach your goal.
It’s all a matter of timing. If you want to know if early retirement is an option for you, then you’ll need to start investing in your pension earlier too. Locate old workplace pensions which might give you an indication of your pension pot size.
Pension Withdrawals: Limits and Rules
Pension withdrawals can be a tricky subject. Most people don’t realize that they’re withdrawing money from their individual retirement account (IRA) until they receive the tax consequences in April of the following year.
In other words, if you withdraw $20,000 to pay for your daughter’s wedding this month and she has her ceremony next week, then you will not have to worry about paying taxes on those funds until April of 2020 when it is time to file your 2019 return.
Tax-free Pension Withdrawals – General Principles
In general, an IRA withdrawal can be made without taxation if the funds were withdrawn for one of the following purposes:
- Purchase a qualified home.
- Pay tuition and fees to either postsecondary school or vocational school.
- Cover medical expenses that exceed health insurance deductible limits.
- Pay tuition for your dependents at any level (including elementary, high, college).
Can I Take My Workplace Pension Early?
Both a defined benefit pension plan or defined contribution pension plan allows you to cash in your pension money once you’re 55. Otherwise, you’ll need permission from your employer if you have a work pension plan.
How Much Does A Pension Reduce If Taken Early?
It decreases at an annual pension rate of 5% each year if you take an early pension.
Should I Take My Pension Lump Sum Early?
You have to consider your current age if you take out a lump sum or not. If you’re still young and you haven’t been paying into your pension for that long, your pension lump sum won’t be considerable. If it’s very little, consider taking a lump sum offer and investing it.
Is There A Penalty for Withdrawing From A Pension Plan?
There is a penalty for withdrawing from most pension plans without first obtaining the plan holder’s permission.
And that’s it!
Now you should be all set on your pension and all the necessary information. Taking your pension early and retiring earlier than the age of 66 has its pros and cons. So, make sure to know everything and are ready for any snares regarding this.