Leaving a Pension Scheme Early

It is only possible to leave a non-state pension scheme (see Non-State Pensions) early. You cannot choose to opt out of the state pension scheme (see State Pensions); your state pension on retirement will be based on the National Insurance contributions you have made over your working life, and will automatically reflect periods when you were unable to pay contributions, perhaps because you were unemployed. It is however possible to leave a non-state pension scheme early, perhaps because you are changing your employer, leaving employment entirely or you have a new financial situation. Make sure that you think carefully before deciding to leave your pension scheme. You may regret the decision when you come to retire, and find you have insufficient funds to live on.

You may find that you do not have to leave the pension scheme as you initially assumed; many occupational pension schemes offer members the chance to leave their money in the pension scheme even if they leave the company. You would need to contact your pension scheme administrator to ask whether this would be possible, and what the terms and conditions would be if you were to leave your pension fund in the occupational pension scheme but would no longer be an employee. You might have to pay higher administration charges, your employer could stop making contributions to your fund, or you might be unable to make additional contributions yourself. However, you may be able to continue to make contributions as usual, and find that the benefits offered in your current scheme outweigh benefits offered by other schemes. Avoid making a hasty decision, consider the advantages that convinced you to become a member initially, and ensure that you have considered all the options before you leave your current scheme. For more information see Freezing your pension fund.

When you choose to leave your current pension scheme you will generally have one of two options: have your contributions refunded, or transfer your savings into a different pension scheme. You will only be able to have your contributions refunded if you have been a member of the pension scheme for less than two years, and any refunded contributions are subject to tax. For more information see Contribution Refund. Transferring your pension fund to another scheme could prove unwise if the conditions offered by the new scheme fail to provide the same benefits as your old scheme would have done, but may be a good decision if you are able to secure a better pension by transferring your pension fund. For more details on transferring your pension fund see Pension Transfer.

Leaving a scheme early is subject to different rules than early retirement from a scheme. Early retirement may result in fewer penalties and risks, especially if your scheme included an early retirement option that enables you to retire early without paying extra administration fees. If you are retiring on grounds of ill health, perhaps even because you are terminally ill, you should be given greater freedom to access your funds without penalties. Many private pension schemes offer their members protection in the event of ill health, such as quick access to funds and a benefit paid to surviving relatives.

For more information on early retirement, including early retirement as a result of illness, see Early / Late Retirement and Non-State Pensions.