Can I take early retirement?

There is no legal requirement to offer early retirement, so if you go early you may well be treated just as if you had left to go to another job.

However some salary related schemes have special provisions for early retirement, though this is often an early casualty of any measures taken to reduce a scheme deficit.

Money purchase schemes cannot offer early retirement as your pension will always depend on the size of your own pension pot. Some employers however may make extra funds available if you take early retirement, especially if they are looking to reduce staff numbers.

In general the law allows you to start drawing a pension once you are 50, and you do not have to stop working in order to do so. This limit will go up to 55 in 2010. In an occupational scheme the rules may impose a higher age limit.

Sometimes employers want to encourage staff to retire early and therefore offer good terms, or they will use 'enhanced' early retirement as an alternative to redundancy.

If there are early retirement provisions that allow you to draw a pension before the scheme's retirement date then there are legal minimum standards that must be followed in salary related schemes.

If your scheme opted out of SERPS or, from 2002, S2P, the portion of your pension that you built up from National Insurance rebates instead of paying into the state second pension is treated differently, and you cannot draw this before you are 60.

For the rest of your pension you must be given at least what is called the 'actuarial equivalent'. This is a complex calculation, but basically an actuary must:

• first work out what it would cost now to buy the pension you would be entitled to if you waited until the normal retirement age before you went;
• secondly, work out the pension you could buy with that sum if you started drawing a pension now, rather than waiting.

This is what you should receive as a minimum, although many schemes do better than this – and make it easier to work out what you would get!

The legal requirement leads to the full actuarial reduction being about nine per cent a year. This means that for every year you start claiming a pension before your normal retirement date, you can find your pension reduced by nine per cent.

Some employers are more generous, however, and reduce it by less. Figures of between three and six per cent are typical. Sometimes there is also a 'no reduction band' – often between 60 and 65 - when you can take the full pension you have earned. Of course if you work longer you will build up extra years in the scheme and probably retire with a higher final salary so would still draw a bigger pension when you do retire.

Some schemes require you to get your employer's permission to take early retirement, even if it is always in practice given. This may reduce the assets the scheme is required to hold, and may reduce the transfer values of the pensions of early leavers as it will assume that it will always cover a pension from 65 but not one from an earlier age.