Drawing a Pension Before Retirement

If you wish to draw an annual pension whilst you are still working, there are no legal restrictions to prevent you from doing so. Essentially this option applies more to people with a defined contribution or money purchase pension scheme, see Occupational defined contribution schemes and Personal Pension Schemes, than to people with defined benefit schemes, see Occupational defined benefit schemes. A defined benefit scheme offers you a specific annual pension when you retire, and bases the value of your retirement pension partly on the number of years you have been a member of the scheme. If you leave the scheme early you will be reducing the number of years you have been a scheme member, and in all probability you will lose a significant amount of pension by choosing to draw your pension before it is necessary. If you have severe financial problems you may choose to leave your defined benefit scheme early and begin drawing a reduced pension, but you should consider the ramifications of your decision on your retirement income entitlement and discuss your options in detail with an independent financial advisor.

If you are a member of a defined contribution or money purchase scheme, you can use the pension fund that you have built up to purchase an annuity, see Annuities, or withdraw a pension from the fund itself, see Income Withdrawal. You can choose to convert your pension fund to an annual pension at any time when you are over the minimum pensionable age, currently set at age fifty and set to increase to age fifty-five from 2010 onwards. If you are buying an annuity earlier than you initially anticipated, you may need to consider that the annuity you are offered may be relatively small; this takes into account the fact that your pension fund has not grown to the size you initially anticipated, and the fact that you are now relatively young and thus your retirement is expected to last many years. If you are considering income withdrawal, bear in mind that once you have used up your pension fund you will have no regular retirement income, and the chance of your pension fund diminishing before your death is inescapably higher the earlier you begin making withdrawals.

When you wrap up your pension fund and use it to provide a retirement income, you will usually not be able to continue making contributions to the fund, and any contributions that your employer made on your behalf will also cease. You will not be required to continue to pay administration charges for the management of your pension fund, since no one will have the task of managing it once it is no longer invested. You may however be required to pay charges which cover the administration involved in wrapping up your pension fund. If you signed a contract agreeing to leave your pension fund invested for a longer period of time, you may have to pay a charge for leaving the scheme ahead of schedule. Your pension scheme administrator should be able to advise you on the rules and regulations of leaving your scheme early, and notify you of any charges you will incur. Your pension counts as taxable income, and will therefore be subject to income tax at your regular rate unless your total income is minimal.

For further details on early retirement see Early retirement due to illness or disability and Early retirement due to occupation.