Taking your pension early might make financial sense
Q
SHOULD I access my defined benefits pension early?
A
DEFINED benefit pension is the gold standard, promising a guaranteed income at retirement for life based on years in the scheme and pensionable salary.
You say you need access to capital and an income, about 12 months early for health reasons.
An option includes early access, but this involves suffering a 5% reduction/penalty on the pension income for the privilege of taking benefits now, rather than in 12 months – so is it worth it?
My first thoughts were that it would be silly to pay a penalty of 5% on a circa £30,000 pension just to access it early, because this would reduce the pension in every year in payment, and you’re only 64.
My calculations showed that the pension taken early would never catch up with the normal retirement age pension. However, It also showed the cumulative value over the years. By taking the money 12 months early over the first 20 years you would receive more money cumulatively. Only after 20 years, would the normal retirement date be financially greater.
So from 64 to 84 you would have received more income. I often speak to clients about chapters in their life and our spending habits tend to be higher in early retirement, than later. Therefore, a front-end loaded retirement income, taking more in the first two decades, rather than later, is a lifestyle financial planning decision which may work for you.
It’s important to do the numbers, reflect on any decision before it’s made and discuss it with everyone affected. Also get independent financial advice before making a decision, as you won’t get a second chance at this decision.
Warren Shute is the author of the bestselling personal finance book The Money Plan. Send your questions to themoneyplanner@warrenshute.com. Get his free money guides at warrenshute.com