Final salary pension early retirement calculator
Working out your annual income for life can be straight forward but it can also be very complex and therefore is best resolved by Retirement Planning. How much money do you need for the rest of your life? It is a very personal matter.
It is better to have a degree of certainty coming from guaranteed income such as the annual benefit from a DB pension (Final Salary Scheme) as well as the state pension. Perhaps even rental income and or a lifetime annuity.
The degree of certainty will be a personal choice and be dependant on the lifestyle you require or aspire to in retirement and the total wealth you have at your disposal at retirement. If you have a risk-averse nature and feel uncomfortable relying on investments, then you would be better looking for as much certainty as you can find.
Phased retirement often takes place between the age of 55 and 67 when people are of pensionable age but still working in some capacity. Currently, to retire at 55 means any tax-free cash will be available to be taken as a lump sum benefit. This minimum age will be increasing to 57 in line with the increase in state pension age of 67 between 2026 and 2028.
This is because people are living longer and therefore the state pension burden on the taxpayer has substantially increased over recent times to approximately £100 billion per year today. But bear in mind that legislation may be altered by the government de jour before the next scheduled change.
Your scheme will work out your reduced pension annual benefit and reduced Lump Sum based on the number of years away from the Normal Retirement Age (NRA) of your scheme.
Some publicly funded Final Salary Pension Schemes such as the Teacher’s Pension Scheme (TPS) provide online websites for their members to get a good idea of what their benefits would be if they retired before normal retirement age from as early as 55 years old. Teachers who have been in the TPS for some time will have an earlier pensionable age than those who joined later.
Publicly funded schemes are in the process of moving over to defined contribution schemes from career-averaged defined benefit pension schemes.
Rather than using an online pension calculator and potentially making a mistake with the figures, it is better to get a written quote you can rely on to make such an important decision as retiring early. The Early Retirement Quote (ERQ) when requested as part of a potential transfer out analysis case is used when assessing the value of the Cash Equivalent Transfer Value offered by your scheme.
Transferring out of a privately funded Final Salary Pension Scheme must be done before commencement of the pension benefits and is often done before the scheme’s Normal Retirement Age (NRA) although some schemes do allow postponement and transfer later than NRA allowing for the transfer value to potentially increase.
Transferring a DB pension CETV to a defined contribution pension pot means giving up a guaranteed income for life in favour of being able to flexibility access your pension fund but as the Financial Conduct Authority point out: This is unlikely to be suitable for most people because giving up guaranteed income will backfire on you if you run out of money.
Personal pensions can be accessed for your annual income requirement by requesting the amount you need from the scheme as a drawdown instruction. The amount can be varied and even stopped altogether if so desired. In fact, since the pensions freedom act 2015, you can withdraw the whole amount subject to income tax. As you can see, defined contribution personal pensions give you enough rope…
It cannot be varied or stopped, and the income is for life as well as being indexed to keep up with inflation.
The subject of pension income is part of a broader financial planning area called Retirement Planning. Financial Planners will look at strategies for building up a retirement nest egg that meets your needs in retirement. This can include more than just pensions but it always looks at the most tax-efficient way to accumulate wealth and spend it too!