what are the penalties for taking early retirement?

supo99

I will like to ask the following question:


Is there really a penalty when someone retires early? I know that the pension payments are reduced to take care of the fact that one is taking the pension for a longer time. What I am not sure about is if there is a punishment for taking the pension early which is different from the need to reduced because one is going to take the money for a longer period of time.

I am a Dr in the NHS, and have contributed to the NHS pension for 17 years. I will like to retire at the age of 54 from NHS service due to certain personal circumstances. I have been quoted figures showing the reductions for retiring ealier than the standard retirement age. I just want to know whether there is a financial penalty for early retirement which is different from reduction based on taking the pension for a longer time.

My next question is; if I leave employment at the age of 54, but delay the payment of my benefits to the age of 55 or longer, am I giving myself any advantage?

I am in the 1995 section and able to retire from the age of 50 onwards.

Thanks for your answers

whitesatin

You need to make sure that you have 30 years of national insurance contributions in order to qualify for a state pension, much further down the line of course.

jamesd

There aren't punishments for taking pensions early within the limits allowed by a scheme, just actuarial or other reductions intended to have comparable effect to an actuarial reduction.

There is not a requirement of 30 years to get the Basic State Pension. 30 years are required to get it all, fewer gets a pro-rated portion of it.

Daniel_Elkington

From experience of working with people in the NHS pension you have an 'actuarial revaluation' for retiring early (earlier than the normal retirement age).

This revaluation is usually very harsh indeed, I would try to stick it out if you can, or at least wait for taking it.

I've seen someone with a normal retirement age of 55 get £10K a year get actuarially revalued to £6K p.a. for retiring at age 50 (all of these were preserved so no more will be paid in).

If inflation is 3% then they would get £7K at their NRA, so the actuaries were basically stealing £3K a year from her. Thankfully she managed to stick it out.

You could ask to be made redundant as the redundancy payment can be surrendered in order to not have this revaluation applied.

There is no issue on voluntary redundancy usually, as it is up to the worker to complain about it, if the worker requests redundancy then that is a different matter and won't stand up in tribunal if the worker then later complains.

sleepless_saver

supo99 wrote: »

My next question is; if I leave employment at the age of 54, but delay the payment of my benefits to the age of 55 or longer, am I giving myself any advantage?

If you leave without drawing the pension immediately i.e you don't retire, I'd have thought you would have to wait until you reach the normal scheme retirement age before you can get it.

Loughton_Monkey

The issue here, for Final Salary pensioners, is that your pension at normal retirement date is cast in tablets of stone. Give 100 Actuaries a copy of the scheme rules, together with your own personal details, and they would all come up with the same answer.

Employers behind each scheme use Actuaries to tell them the "value" of the entire membership's benefits, but this is only a 'forecast' based on assumptions. At the end of the day, the employer must pump in enough money to fund the benefits.

The minute you tell them you want to depart from the normal retirement date, then there is a problem. The Actuary now has to calculate your own, unique, individual, 'value', based upon the rights you have. So now ask 100 Actuaries to do this, and you will get 100 different answers. They will each make different combinations of assumptions.

You have to ask yourself what 'flavour' of assumptions will the Actuary use? Ones that tend to favour the employee? Or ones that favour the employer?

In my own particular case [although I had absolutely no intention of taking the pension early], I contacted my scheme most years to get a quote for early pension, but this was simply to get a handle on its "value".

I can tell you that by the time my actual normal retirement date, the actual valuation turned out to be in the order of 50% more than I had been led to believe by 'quotations' for early retirement.

And furthermore, knowing true market annuity rates, the official "valuation" [used for my 25% lump sum] looked extremely 'thin'. In other words, the true cost to them will be significantly higher.

Hence I would recommend to everyone that they stick to 'Normal Retirement Date' if at all possible. Even if you have to live on savings for a few years. Your income is then contractually fixed. Depart from NRD and the 'contract' is effectively out of the window and you 'get what you get'!

jem16

Daniel_Elkington wrote: »

I've seen someone with a normal retirement age of 55 get £10K a year get actuarially revalued to £6K p.a. for retiring at age 50 (all of these were preserved so no more will be paid in).

The problem is that anyone who has a retiral age of 55 has Special Class Status and it's not the normal scheme retirement age.

If they choose to retire at age 50 they lose that status and the reduction is applied on the normal retirement age of 60 - so a loss of 10 years and therefore 37%.

So with Special Class Status really important to try and stick it out till 55.

whitesatin

jamesd wrote: »

There aren't punishments for taking pensions early within the limits allowed by a scheme, just actuarial or other reductions intended to have comparable effect to an actuarial reduction.

There is not a requirement of 30 years to get the Basic State Pension. 30 years are required to get it all, fewer gets a pro-rated portion of it.

You are, of course, right. I didn't explain that at all.:o

supo99

Thanks for all your replies and explanations.
My decision to retire early was made by circumstances beyond my control. I know that after a year or two, I will return to do some work, though this is likely to be different from what I am doing now.
In summary, what I could garner from the replies are:
1. There is a big loss for retiring early as the calculations are more likely to favour the actuaries rather than the retiree. I initially thought the calculations should remain the same irrespective of who is doing it, to make things fair.
2. I am not sure if there is any gain in delaying taking the benefits if there are no further contributions being made; which makes me think I might as well start taking the benefits.

My normal retirement age is 60, anything earlier will lead to actuarially reduced pension.

supo99

Any further help on my above questions

xylophone

http://www.nhsbsa.nhs.uk/RulesandBenefits.aspx
http://www.nhsbsa.nhs.uk/Deferred.aspx