Your retirement age and your pension

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If you want to take a workplace or private pension later than you’d originally planned, how does that affect your pension? One pensions company is warning that people could lose out on thousands of pounds.

Your retirement age and final salary pensions

Workplace pensions, including 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.

JARGON ALERT: Final salary pensions are also called ‘defined benefit’ pensions. All final salary pensions are defined benefit, but some defined benefit pensions aren’t final salary. That’s because they are based on your salary throughout your time with the employer and not your salary before retirement. This type of pension is called a ‘career average’ pensions. I hope that’s made it a bit clearer, and not more confusing!

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 at the normal retirement age. However, 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 later you leave it before you take your pension, the bigger the amount you should receive each month/year. That’s because the pension scheme doesn’t have to pay out for as many years as if you took it at the normal retirement age.

SAVVY TIP: 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, 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 later, you can simply leave your pension 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. I’ll explain this more in the section below on ‘lifestyling’.

Leaving lifestyling out of the picture for now, there’s another issue you need to consider. Namely, 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.

SAVVY TIP: If you want to get some tips and help for free, and you’re aged at least 50, you can arrange a phone appointment via the government’s free service called Pension Wise.

Defined contribution pensions with lifestyling

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

However, with automatic enrolment pensions, 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 around 15 years before the normal retirement age.

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. They’ve chosen the age of 68 because it is the state pension age for anyone under 41.

  • 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 £167,700.

NB: Aviva has made certain assumptions about the performance (it’s based it on one of its own default funds), about how much pension contributions increase by and about the rate of inflation.

Personal pensions

If you take out a pension directly with a pension provider, or through an independent financial adviser, you can pick your own retirement age. Also, you have to choose your investment funds. However, a number of the funds on offer also have lifestyling. So your pension money may be invested in a fund that will move your money to lower risk investments, based on the retirement age you’ve chosen.

With a personal pension, it’s easy to change the retirement age you’ve chosen.

Things to consider:

  • 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. You can probably check this online.
  • 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.
  • Change your retirement age if it doesn’t reflect when you want to take your pension.
  • Contact an independent financial adviser if you want tailored advice about what to do.

Related articles:

Tax relief on workplace pensions

How to reduce the risk your pension is taking on as you approach retirement

What’s in your pension? Understanding workplace pension default funds

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