In the dim and distant past, before the 6 April 2006 'A-Day' when the last major pensions upheaval took place, the tax man allowed pension schemes to provide earlier-than-normal retirement dates for individuals who were unlikely to be able to continue working until they reached the 'normal' retirement age of 60. Examples cited in published official guidance were “most professional sports people (footballers, athletes etc), airline pilots and deep-sea divers” who “would not be physically capable of continuing . . . up to age 60”.
On A-Day the normal retirement age for pension schemes was reduced, allowing retirement from age 50 onwards, although that age has now increased to 55. However, there is no longer any provision for earlier retirement in approved pension schemes which leaves people in many professions with a problem: if they contribute to a pension scheme the benefits may be locked away for a long time after their first careers have ended. A top footballer may be able to make alternative provision but for less well-paid sports people and members of other professions that rely on physical fitness, dancers for example, there is a gap that needs to be filled between retirement from that profession and the availability of pension.
Pensions can still be taken earlier than age 55, from 35 onwards in fact, but there is a penalty: for every year that a pension is taken early, the lifetime allowance is reduced by 2.5%. Take, for example an individual retiring in 2010/11 aged 35 with pension rights totalling £450,000.
- The lifetime allowance is halved (2.5% x 20 years): 50% of £1,800,000 = £900,000
- Therefore half of the available scope for funding has been used up.
- Therefore the scope for future funding is the remainder of the reduced lifetime limit.
This is unwelcome: early retirees need to think carefully before drawing on their pension because doing so both reduces the permitted size of the pot from which they may pay for their pension and restricts their scope for making further contributions in future.