Considering early retirement? Get some free advice

Do you understand your pension, when you can start drawing it down and what the pros and cons of doing that might be?

Many people have chosen to take early retirement since the pandemic hit, but is that based on sound financial thinking? workingwise.co.uk’s research shows many people don’t full understand their pensions and know all the pension pots they might have. Yet understanding your pension is crucial when it comes to planning your future.

If you don’t fully understand all the issues, there is free help avaiable to help you decide on when you might be able to retire. Pension Wise is a government service that offers free, impartial pensions guidance for those in defined contribution pension schemes, as opposed to defined benefit schemes and the state pension.

With a defined contribution pension you build up a pot of money that you can use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income you might get from a defined contribution scheme depends on factors including the amount you pay in, the fund’s investment performance and the choices you make at retirement.

From the age of 55 (rising to 57 from 2028) and depending on your circumstances, you can choose:

• to keep your pension savings where they are;
• use your pension pot to buy a lifetime or fixed term annuity which guarantees an income for life or a fixed term.  The income is taxable, but you can choose to take up to 25% (sometimes more with certain plans) of your pot as a one-off tax-free lump sum at the start.
• use your pension pot to provide a flexible retirement income – also known as pension drawdown. You can take the amount you’re allowed to take as a tax-free lump sum, then use the rest to provide a regular taxable income.
• take a number of lump sums – usually the first 25% of each lump sum withdrawal from your pot will be tax-free. The rest will be taxed.
• take your pension pot in one go – usually the first 25% will be tax-free and the rest is taxable
• mix your options – choose any combination of the above, using different parts of your pot or separate pots.

It is a complicated decision and to help with it, you can book a free appointment with Pension Wise to talk through your options and how they will affect your financial situation on retirement. They will go through things you might not have considered such as your plans to continue working, your personal and financial circumstances and leaving money after you die; all the payment options available; tax implications; how to avoid scams and so forth.

Anyone over 50 can use the service. Pension Wise is part of the Money Helper site which is provided free by the Government’s Money & Pensions Service and offers advice about all things financial.

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