Deciding when to take your pension is a big choice as you approach retirement. Timing is everything. It can shape your financial security and affect your daily life throughout retirement. With various types of pensions out there and plenty of factors to think about, it’s easy to feel lost. But don’t worry, we’ll guide you through your options so you can figure out the best time to access your pension.
You can typically tap into your personal or workplace pension when you reach your normal minimum pension age (NMPA). Right now, that’s 55 years old, but it’ll soon rise to 57 years old from 2028. Just remember, having access doesn’t mean you have to start using it immediately. Also, be aware that the State Pension age (currently 66) is increasing to 67 years old by 2028.
How does retirement age impact your pension income?
The age at which you choose to retire can have a significant impact on your pension income. You essentially have two paths:
- you can either start claiming a smaller pension sooner; or
- wait a bit longer to receive a larger pension later on.
If you choose to retire early, you might find that your pension is smaller. This could make it harder to enjoy a comfortable lifestyle as you age. If financial difficulties arise, you may even need to go back to work, which can be challenging due to age bias.
On the flip side, if you decide to delay your retirement, you’ll be working for longer. This could impact your health and prevent you from chasing personal goals. You might miss out on important time with family or hobbies that you love.
Your retirement options explained
Let’s look at the example of Sophie, who’s 50 years old and isn’t sure when to retire. She has consolidated her old workplace pensions and now has a single retirement pot of £250,000.
The following is based on assumptions from our Pension Calculator that she:
- only has defined contribution pensions;
- achieves investment growth of 5% per year;
- experiences inflation of 2.5% per year;
- pays an annual fee of 0.70%;
- claims her full new State Pension (currently worth £11,502.40 per year, 2024/25) from 67 years old; and
- lives until 100 years old.
Keep in mind that investment growth is influenced by market fluctuations. While the assumptions in this example provide a useful framework, actual returns can vary due to factors such as elections and interest rates.
While working, Sophie and her employer contribute £250 each month to her workplace pension through Auto-Enrolment. Additionally, she makes personal contributions of £200 monthly, benefiting from an extra £50 in tax relief.
Let’s explore some scenarios Sophie could consider to determine the best time to take her pension.
Retiring at 57 years old
Sophie decides to retire at her normal minimum pension age (NMPA) of 57 years old, which is the earliest she can access her private pension savings. By that time, her pension pot could have grown to £332,000.
This could generate Sophie a pre-tax annual income of around £17,200 (or £1,433 a month) from the beginning of her retirement until she turns 100 years old. This amount includes her full new State Pension entitlement from 67 years old.
Retiring at 60 years old
Sophie could choose to work for a further three years, which could increase her pension pot by over £38,000. This decision could allow her to retire at 60 years old with a personal pension of £370,000.
This could generate Sophie a pre-tax annual income of around £19,800 (or £1,650 a month) from the beginning of her retirement until she turns 100 years old. This amount includes her full new State Pension entitlement from 67 years old.
Retiring at 64 years old
If Sophie opts to retire at 64 years old, she could enjoy a sizable pension pot worth £424,000. Simply by delaying her retirement date by seven years, she could grow her pension savings by an impressive £92,000.
This could generate Sophie a pre-tax annual income of around £23,600 (or £1,967 a month) from the beginning of her retirement until she turns 100 years old. This amount includes her full new State Pension entitlement from 67 years old.
Retiring at 67 years old
Sophie could consider delaying withdrawing from her personal pension until she reaches her State Pension age at 67 years old. By doing so, she could grow her pension pot by a staggering £134,000 - resulting in a pension pot of £466,000.
This could generate Sophie a pre-tax annual income of around £27,900 (or £2,325 a month) from the beginning of her retirement until she turns 100 years old. This amount includes her full new State Pension entitlement.
Planning is key to reaching your retirement goals
As we see in Sophie’s example, the timing of when to take your pension can significantly impact your income in retirement.
When thinking about your dream retirement, consider these important points:
- Visualise your retirement - picture the age and lifestyle you want. Knowing how much you’ve saved in your pension is essential for figuring out when you can enjoy that dream life. This helps you see how close you are to your savings goals and what you might need to contribute to get there.
- Consolidate your pensions - if you have several old pension pots, think about bringing them together into one easy-to-manage plan. This way, you can clearly see your total pension balance and keep track of how your investments are doing.
- Boost your savings - consider setting up a regular contribution into your personal pension. When you make personal contributions, most basic rate taxpayers receive a 25% tax top up. This means that for every £100 you put into your pension, HMRC adds an extra £25, making it £125.
By planning ahead and understanding your options, you can set yourself on the path to achieving your retirement goals.
Summary
It’s important to remember that everyone’s situation is unique. Retirement isn’t just about numbers - it’s about creating the lifestyle you want while ensuring your pension can support you for the years ahead. If you’re unsure about your next steps, you can find a regulated Independent Financial Adviser through Unbiased.
Additionally, if you’re still feeling uncertain about your retirement plans, consider booking a free appointment with Pension Wise, a government-backed service from MoneyHelper, once you turn 50. This service is designed to help you understand your options as you approach retirement.
The best part? The appointment is completely free and impartial, giving you the chance to ask any questions you may have without any pressure. If you’re aged under 50, the MoneyHelper website provides a wealth of useful information related to pensions and broader financial matters.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
