In this section, when we talk about Early Retirement, we are referring to someone taking their benefits from their pension plan before they have reached their normal retirement age. It is of course perfectly possible to cease working without drawing on your pension until a later date, provided that you have the financial resources to support yourself in the interim.
Different rules apply for early retirement owing to ill health.
If you are retiring early, there may be several different ways in which you can manage your pension options. Some of these options could include one or a number of a tax free cash lump sum, a taxable lump sum, a retirement income for life (annuity) or an Approved Retirement Fund.
Issues to consider when taking early retirement benefits
When considering taking your pension benefits early you should consider the following issues:
- If you will be using your pension plan to provide you with an annual income, the earlier that you take your benefits the lower that annual income is likely to be
- Whether you will be able to fund, either from your pension or from other assets or income sources, the standard of living that you require in retirement
- If you take your pension benefits early you may be unable to continue to work in the employment that related to that particular pension.
Tax considerations of early retirement
It may seem attractive to draw benefits from one or more of your pension plans and also supplement your income by continuing to work in some capacity. While this is usually possible, there may be tax implications. For example, if you are a single person with employment income of €25,000 you may be a standard rate taxpayer. If however you add pension income of €30,000 to that, most of the pension income will be taxed at the higher rate. It may be more tax efficient to delay taking your pension.
Social welfare implications of early retirement
If you are receiving social welfare payments, they may be affected by taking early retirement. Some social welfare payments are not means tested, but some of them are. The higher the level of your income and non-pension assets, the less you will be entitled to from the state.
Upon reaching the State Pension Age you should be entitled to the state contributory pension, in full or in part, depending on the number of PRSI contributions you have made in your working life. The state pension is not means tested. Similarly, Jobseekers Benefit, which is paid for 9 months to 1 year after redundancy, is not means tested.
However, the non-contributory state pension (payable to individuals with inadequate PRSI contributions) and Jobseekers Allowance (payable once Jobseekers Benefit has elapsed) are subject to means testing. If you take early retirement from your pension plans, your pension income could result in you failing the means test and having your state benefits reduced.
Early retirement with a PRSA
If you hold a PRSA, you may take benefits from your PRSA whenever you wish from age 60. If you are retiring from employment, you can take your benefits from your PRSA any time from age 50.
The earlier you draw benefits from your PRSA, the lower the benefits you are likely to receive. The longer you leave your PRSA in place, the more you can contribute and the more it can grow.
Early retirement with a Personal Pension
If you hold a Personal Pension and are ceasing employment, you may take benefits from your Personal Pension whenever you wish from age 60.
The earlier you draw benefits from your Personal Pension, the lower the benefits it is likely to produce. The longer you leave your Personal Pension in place, the more you can contribute and the more it can grow.
Early retirement from a defined benefit occupational pension scheme
Early retirement from a defined benefit occupational pension scheme can be problematic. As with any pension, if you retire early it is likely that the benefit you receive will be less than if you deferred taking your pension until normal scheme retirement age. Typically, for every month you may be short of normal retirement age, your retirement benefits will be reduced by a percentage.
An additional complication relates to scheme solvency. Many defined benefit pension schemes are technically insolvent – which is to say that, in simple terms, they would not be able to meet all obligations to members without additional funding. The trustees of insolvent schemes are highly unlikely to permit early retirement. A great many defined benefit schemes are technically insolvent at present due to sharp falls in investment markets during the 2000-2010 decade.
Early retirement may imply a lower tax free lump sum than would otherwise have been obtained.
Early retirement from a defined contribution occupational pension scheme
It should be possible to take early retirement from a defined contribution pension scheme any time from age 50, provided this is permitted by the rules of the scheme. The value of your benefits on early retirement from a defined contribution scheme will largely be driven by the value of your fund.
As with a PRSA or personal pension, the earlier you draw benefits from your pension scheme, the lower the benefits it is likely to produce. The longer you leave your pension fund in place, the more you can contribute and the more it can grow.