When can I retire?
'Retirement' is defined as a watershed point in our lives when we choose to leave the workforce. 'When can I retire?' is a question we've probably all asked ourselves at some point in time and is particularly topical now with the recent changes to the state pension.
However, this should really be split in to two questions:
What age can I retire?
There's no hard and fast rules governing when we can or can't do this. However, most retirements are funded by a pension - and the current rules allow you to draw on your personal pension savings from age 55.
How much do I need to retire?
Just exactly when we are able to retire will always depend on if we have adequate funds in place to live on. There's no doubt that the earlier you start planning the more time you'll have to build your savings and make adjustments.
You can use our retirement budget planner to help you understand your income sources and expenditure throughout retirement.
There are several ways to fund your retirement, but for many it will include the State Pension, and your own private pension provision.
1. The State Pension
The State Pension is provided by the government and pays you a regular income in retirement.
Until fairly recently, the age at which past generations claimed their state pension remained constant at 65 for men and 60 for women.
But that's all changing now. Increases in average life expectancy led to the government deciding that new legislation was necessary to increase the state pension age.
It is envisaged that from 2020, both men and women's state pension age will have increased to 66, then increase further to 67 between 2026 and 2028. It would be linked to future average life expectancy figures thereafter.
Furthermore on top of these age thresholds the government will review the state pension situation every five years regardless of the above changes.
Who is eligible for a state pension?
Not everyone is entitled to the UK full state pension. Eligibility depends upon certain criteria being met.
If you reached State Pension age prior to 6th April 2016, then you will have qualified under the old basic state pension rules.
This means you must have worked in the UK and have made National Insurance contributions for 30 years or have paid voluntary contributions.
If you reach state pension age after 6th April 2016, then you will qualify under the new state pension rules, which means you'll usually need at least 10 qualifying years on your National Insurance record to get any State Pension, and 35 qualifying years to get the full new State Pension.
If you have between 10 and 35 qualifying years, then you will receive a proportion of the new state pension.
If you are unsure what this means for you, then you can get more detailed information here
When can I begin to receive a state pension?
The exact date that you get your state pension will depend on your date of birth. You can work out your date of retirement using the State Pension calculator.
Currently the retirement age for men is 65, however since 2010 the retirement age for women (the age at which they receive their state pension) has been changing to bring it in line with the male retirement age of 65, although parity is some way off yet.
By April 6 2016 the retirement age for women had risen to 63. By December 2018, this will have risen to 65 for women, and by October 2020 the retirement age for both men and women will have risen to 66.
Of course that's not to say you have to retire at your state pension age. You can defer your retirement and delay taking your state pension if you wish. Read more about delaying your retirement.
2. Personal Pensions
Generally there are two types of personal pension, known as 'Defined Contribution' and 'Defined Benefit'.
A defined contribution pension (sometimes referred to as a 'Personal Pension' or 'money purchase' scheme) is a pension scheme that you can arrange yourself, or your employer may offer as a 'workplace pension'. You (and possibly your employer) will contribute into your pension fund. The size of your pension pot is largely based on how much you pay in, as well as how your fund performs.
A defined benefit pension scheme (sometimes called a 'final salary' pension scheme) is one that is set up by your employer, and guarantees to pay out an income at a set age based on how much the retiree earned. Unlike defined contribution pensions, the income amount is set, and is paid directly to you at retirement. These types of scheme can be expensive to run, and are becoming increasingly rare.
When can I begin to receive my personal pension?
For defined contribution pensions (personal pensions), you can access your pension pot from age 55. Be careful though, as the pension policy may have a 'Nominal' (NRA) or 'Selected' (SRA) retirement age that is different. This may be due to how the pension is charged, so it is best to check with the pension provider first to see if you might incur any early exit penalties.
For defined benefit schemes (final salary), the scheme will usually dictate the age at which benefits can be taken. It can vary but is often 60 or 65.
Your pension provider will be able to advise you when you can begin to take your pension. If it's a defined contributions scheme speak to your Policy Provider and if it's a defined benefits scheme seek out your Scheme Administrator.
How will my pension be paid?
If you have a defined contribution pension (personal pension), you can now take your benefits however you want, but you need to make a choice, the pension plan doesn't usually pay out automatically.
You can choose to:
- Take the whole pot as a lump sum. Do bear in mind that only the first 25% of this lump sum can be taken tax free.
- Use a flexi-access drawdown plan. This allows you to draw income or lump sums whenever you wish with no limits, but remains invested. Therefore there remains the risk you could potentially run out of money.
- Buy a Guaranteed Income for Life (provided by a pension annuity). This pays an income to you (with options to continue to loved ones), regardless of how long you live.
- Defer. Just because you've reached the right age, doesn't mean you have to take your benefits right away.
- A combination of the above.
There are pros and cons to each of these options, including potential tax issues. Click here to find out more about the options available