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How To Retire Early: Does It Affect Your Pension?

Last updated 15th February 2022

4 min read

an elderly couple walking outside

If you’re seriously thinking about how to retire early, you’ll need to get your head around the different factors that are required to make your dream a reality.

At first glance, working towards an early retirement may seem like an attractive option, but there are some downsides which you will need to be aware of before making your decision.

To give you confidence in your decision, this guide will take you through all the important considerations you need to start thinking about now - including exactly how taking an early retirement could impact your pension.

What is early retirement?

Simply put, early retirement means that you stop working when you’re younger than the State Pension age. This is currently set at 66 and is set to increase over time, so the age which is considered ‘early retirement’ will also increase.

There used to be an enforced default retirement age of 65, but this was scrapped in 2011 to allow individuals to choose when they stop working themselves. Instead, the official retirement age generally follows the State Pension age, which is the age at which you start receiving your State Pension.

As of 2022, the State Pension age currently stands at 66 years of age, though this will continue to increase over the years. You can learn more about this by reading our helpful guide on understanding your retirement age.

Does early retirement affect how you receive your pension?

Yes - there are certainly some considerations you need to think about when it comes to early retirement and the different types of pension that you may have access to.

State Pension

First and foremost, you won’t start receiving your State Pension until you reach the State Pension age. The earlier you retire, the longer you will have to wait to start receiving payments, which will need to be factored in when considering your future financial security.

Use this handy government calculator to find out your State Pension age.

Workplace Pensions

When it comes to your workplace pension, the rules will vary from provider to provider. In fact, some schemes may not allow you to take your pension before what is called the ‘normal retirement age’ that is defined by the scheme itself.

That being said, whether you have a defined contribution or defined benefit pension, some providers may offer incentives if you take an early retirement package.

Make sure to get in touch with your pension provider to find out their ‘normal retirement age’ and any early retirement benefits that may be on offer.

Impact on defined contribution pensions

If you can withdraw from a defined contribution scheme early, you are likely to receive a smaller pension than you would if you had worked right up until the State Pension age. This is because you have had fewer years to pay into your pension pot.

On top of that, as the money in your pension pot will need to be paid out over a longer period, your regular payments will be smaller.

Impact on defined benefit or 'final salary' pensions

Final salary schemes calculate your pension as a fraction of your salary multiplied by the number of years you were a part of the scheme. Typically, as you would have spent fewer years in the scheme with an early retirement, your pension will be smaller.

Your pension scheme may also reduce the amount of pension they pay out to you if you want to draw out before the defined ‘normal retirement age’.

Can you retire early due to ill health?

If you are retiring due to ill health, there is the possibility that your private pension plan will allow you to access your pension pot early and/or receive higher payments than usual.

If you have a life expectancy of less than a year, it may also be possible for you to receive your entire pension pot as one tax-free lump sum. If that’s the case, you will need:

  • To be under 75 years of age
  • To have less than the lifetime allowance in pension savings

Read our guide on ill health retirement for more information and speak to your pension provider to find out their policy on early retirement due to ill health.

How to retire early

There is no set rulebook on how to retire early. Achieving an early retirement is completely down to you, your planning and your unique set of circumstances.

You’ll want to have enough financial security to live comfortably in retirement, so while we can’t offer an easy step-by-step guide, we can give you some points to think about:

  • When can you start drawing out your workplace or State Pension pension payments?
  • How much income are you likely to receive from your pension provider(s)?
  • Do you still need to pay off existing loans or your mortgage?
  • How will your benefits change after retirement? Consider any loss of workplace benefits, such as a company car.
  • What sort of lifestyle do you want after retirement, and what would it cost?

Ultimately, an early retirement requires careful planning and planning - you can read more about how much money you need to retire in our guide.

Taking a phased retirement

Instead of taking an early retirement, some people may choose to take a phased approach - that is, gradually reducing their working hours over a prolonged period of time while only withdrawing a small part of their workplace pension.

You should check with your workplace pension provider whether they offer this option, allowing you to draw out only a small part of your pension before increasing the amount at a later date.

Learn more about retirement planning

After reading this guide, we hope you have more confidence in your decision when considering how to retire early. For more helpful information, read our retirement planning guide which discusses how you may increase your personal or workplace pension pot.

If you’d like to learn more about how SunLife can help you plan for life after retirement, explore our services below:

If you’d like to speak to a member of our friendly team, get in touch today to find out how we can help.