Your retirement date and your pension

With the state pension age rising, and the way we work changing – for some – the age at which we retire can change.

Here, we look at when you might receive your pension, and how when you take it can affect the how much you get in retirement

Final salary pensions

Old style final salary pensions set an age when people are expected to retire. This age – called a normal retirement age – can vary from profession to profession and scheme to scheme, but it’s typically 65. However, it could be 60 or even younger. You generally can’t retire earlier than this age without receiving a lower pension.

Final salary pensions are also called ‘defined benefit’ pensions. Some defined benefit pensions aren’t final salary because they are based on your salary throughout your time with the employer and not your salary before retirement. These are called ‘career average’ pensions.

If you want to carry on working, or if you can manage financially without taking your final salary pension, you don’t have to take it. Your employer (or to be more accurate, the pension scheme rules) may insist that you take your pension once you’ve had your 75th birthday.

The longer you leave it before you take your pension, the bigger the amount you should receive each month/year. That’s because the pension doesn’t have to pay out for as many years as if you took your pension earlier.

Although you’re likely to get a larger pension payment every month if you take it later, you won’t be paid the pension you ‘missed out on’.

Defined contribution workplace pensions

With a defined contribution pension, sometimes known as a money purchase pension, you have a fund or pot of money that you and your employer pay into. Automatic-enrolment pensions are generally defined contribution pensions.

As with final salary pensions, these workplace pension schemes will set a normal retirement age. If you want to retire late or you don’t want to take money from your pension then, you can simply leave it where it is. However, depending on the kind of funds your money is invested in, you could lose out by delaying your retirement, unless you tell the pension scheme well in advance. This is explained in more detail in the section below on ‘lifestyling’.

Leaving lifestyling out of the picture for now, there’s another issue you need to consider. And that’s that your pension money may be invested in riskier investments than you feel comfortable with. What might have seemed like a good idea when you were in your 40s may not be such a good plan when you’re in your 60s. It’s the kind of decision that it’s a really good idea to take independent financial advice about. However, you will have to pay for this advice.

If you want to get some tips and guidance for free, and you’re aged at least 50, you can arrange a phone appointment via the government’s free service called Pension Wise. If you want personal recommendations or advice about your specific circumstances, you can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.

Defined contribution pensions with lifestyling

If you sign up to a defined contribution workplace pension, your money will usually be invested in what’s called a ‘default fund’ unless you actively choose other funds. These funds used to vary quite widely – and still can.

However, default funds use something called ‘lifestyling’, which means they gradually move your money from riskier investments, such as shares, to lower risk ones, such as bonds and cash. This process generally starts happening between 15 and ten years before the normal retirement age. Find out more about where your pension is invested here.

Higher risk funds have the potential for higher returns (although that’s obviously not guaranteed). Lower risk funds generally produce lower but steadier returns. According to the pensions and insurance company, Aviva, changing when you retire but not telling your pension company in advance, can knock thousands of pounds off the value of your pension.

It gives three examples based on someone earning the average UK salary of £27,664, automatically enrolled into their workplace pension age the age of 22 and with the legal minimum contributions (of approximately 8% of salary) being paid in by employer and employee.

  • Retirement age set to 68, lifestyling begins at 53 – Total fund value at 68 is £137,600
  • Retirement age set to 65, lifestyling begins at 50 – Total fund value at 68 is £133,500
  • Retirement age set to 60, lifestyling begins at 45 – Total fund value at 68 is £127,700

Personal pensions

If you take out a pension directly with a pension provider, or through an independent financial adviser, you can usually pick your own retirement age. Also, you have to choose your investment funds. However, a number of the funds on offer also have lifestyling.

Action points:

  • If you’re in a workplace defined contribution pension and you don’t know what the normal retirement age is, ask your HR department or the pension provider.
  • If you want to retire later than the age you’ve chosen, check to see if you’re in a default fund or one that has lifestyling.
  • If your pension money is in a default fund or a fund that has lifestyling, check when the lifestyling kicks in – namely, when the fund starts moving your money from shares and into bonds and cash.
  • Change your retirement age. You can normally do this online. If you don’t already have an online account, you’ll have to set one up.
  • Contact an independent financial adviser if you want tailored advice about what to do.
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