July 22nd, 2020

“Can I take my final salary pension at 55?” – Here’s the answer

It’s been on your mind for a while: “Can I take my final salary pension at 55?” Let’s get to the bottom of it.

Can I take my final salary pension at 55?

Retiring at 55 with a guaranteed income for life. It’s the dream for many people.

But hold your horses.

Your ability to take your final salary pension at 55 depends on the specific rules of your pension scheme or pension provider. Most final salary schemes have rules that define a ‘normal retirement age’. And you can only begin drawing your pension once you have passed this age. The threshold is typically 60 or 65 years old, but you will have to check with your pension provider to be certain. Like we said, every scheme is different.  

The earlier you take your pension, the lower its value. But drawing your pension before the stipulated retirement age will incur charges. The reduction in income for taking your pension early will vary with each scheme – and depends what the normal retirement age of the scheme was when you were accruing benefits.

If you can, it really is best to wait. Final salary pensions are a fabulous deal for employees – so it’s best to do what you can to protect the value of your future finances.   

Side note: what makes final salary pensions so good?

When you have a final salary pension – sometimes known as a defined benefit pension – your employer has made a pledge to pay you a guaranteed income throughout your retirement years – regardless of external factors like fluctuating markets. And because defined benefit pensions adjust with inflation, your income maintains its value relative to the cost of living as you get older. A great deal for employees, but expensive for employers.

>> Pension advice: how does a final salary pension work?

Of course, when your future financial wellbeing is dependent on your employer, it’s natural to have worries about what would happen if your employer went bust. Luckily the government has already thought of that. The Pension Protection Fund ensures that, once you reach age 65, you will receive 90% of your pension (up to a maximum of £37,315).

To wrap up: final salary pensions are a great deal for employees.

It’s great that you have one.

But…

What if you need money now?

If you need a cash injection, there are things you can do with your final salary pension. One option is to transfer into a defined contribution pension. This will make it easier to access your funds. But the trade off – and it’s a big one – is that you lose the security of a guaranteed income. It’s also possible to try and offset the charges of taking your pension early by continuing to pay into it. But that’s woefully inefficient and will leave you with less money in the long run. In short: consider exploring other avenues to raise capital before touching your pension. You may find they are far more efficient in terms of cost.

What about transferring out?

Okay, this is a big one.

There is another way to capitalise on your pension without incurring charges.

Remember that with a final salary pension your employer is committed to paying you a guaranteed income for life. It’s a huge commitment. And for that reason many employers are offering generous sums to essentially buy you out of your pension. You get a cash lump sum in exchange for giving up your guaranteed lifetime income.  

You may be able to secure up to 30-times the value of your annual pension entitlement to transfer out. It can be hard to ignore such a large sum of money when it’s placed in front of you. But try to retain perspective. Taking the lump sum means giving up guaranteed income for life. And once you have the lump sum, the onus is on you to manage your money in a way that sustains your retirement ambitions. That may involve some complicated investment decisions.

Essentially you are balancing your desire for capital against your appetite for risk.

Only you know where your boundaries are.

But it can help to talk it through with an impartial expert.  

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Nothing in this article construes, or is intended to construe, financial advice. You should always seek advice from a professional financial adviser who is familiar with this type of pension planning, to ensure any recommendations made will be suitable for your circumstances.

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