Early retirement penalty?

By THIS IS MONEY
Updated:

 

I have worked for an American IT company for the last 18 years, contributing to their final salary pension scheme. Now 57, I am considering retiring at age 60.

I have been advised that retiring early may not be the best idea because between the age of 60 and 65 my pension will double. Does this apply to final salary schemes? CZ, Northampton.

Des Hamilton at the Pensions Advisory Service OPAS says: If you retire early you normally suffer two reductions in your pension expectations.

First there is the loss of the years of service between 60 and 65. And second, there is a further reduction due to the fact that the pension is paid earlier and for longer - usually a reduction of about 5% for each year that you take it early.

If your scheme were to give one sixtieth of salary for each year of service then I estimate you would be entitled to a pension at age 65 of 43% but this would reduce to about 26% if you take it at age 60. However, check with the scheme administrator, as some schemes don't apply the second reduction.

Also you might consider making extra pension savings through AVCs to make up for the reductions you may suffer if you take your pension early. Even if you can't afford to retire at 60, you may be able to retire sometime between 60 and 65.

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