Early Retirement vs Redundancy: What is best?

With job uncertainty, particularly in the oil and gas sector, some people may be offered early retirement as an alternative to voluntary redundancy.

But before giving up work, it’s important to weigh up the pros and cons, and think carefully about how you’ll manage financially.

Early retirement - the pros and cons

There are lots of good reasons for taking early retirement. It can be an attractive option if you don’t like your job, if you fancy a change in lifestyle or – as is the driver for many people – if you think it will be better for your health.

But whatever the reasons, it’s important to also consider the downsides – and there are a few pretty major ones:

• You won’t have any redundancy rights, and you won’t receive any redundancy pay.
• You’re likely to receive a smaller pension than if you worked until normal retirement age, unless your employer is offering a substantially enhanced package.
• The earliest age you can start taking a workplace pension is 55, but you won’t get a State Pension until your mid-60s.

What are the benefits

Many employers will try and make your early retirement package more attractive by building in some incentives. The incentive they offer you will depend on what type of workplace pension you’re in. There are two types - defined contribution and defined benefit. Incentives your employer might offer could include, for example:

• A lump-sum payment into your defined contribution pension to boost the value of your fund, or
• Pension benefits that are worked out as if you had worked to normal retirement age (if you’re in a defined benefit scheme).

Either incentive will give you a better pension than you might otherwise be entitled to.

Consider all the facts

When considering retiring early, it’s easy to be swayed by thoughts of winter sun, days spent in the garden or more time with your family. What’s required here, however, is a cool head and a disciplined approach. In short, you need a checklist.

First, work out how much income you will have. As life expectancy increases, the average time spent in retirement is nearly 20 years – more than double that of our grandparents. Your total income is likely to be a lot more complicated than it was when you simply received your salary at the end of each month. You may receive income from more than one pension, as well as from savings and from benefits or from a part-time job. The first step, then, is to add it all up.

• Ask your employer for an illustration of the pension you will get if you take early retirement.
• Get a forecast from any other pensions you have (such as a personal pension or one from a previous employer) if you intend to start those early too.
• If you decide to buy an annuity or will be receiving payouts from a defined benefit pension you should check whether they have built-in increases each year. You might want to put off claiming some pensions for now or even save extra if they don’t.

Pension options

If you take early retirement, you’ll need to decide what to do with your pension fund.

If you have a defined contribution pension, you will be able to take as much money as you want out of it. One quarter of what you take out will be tax-free, but the rest will be taxable.

Get advice

Pension planning can be hard to understand at the best of times. If you’re in any doubt about what to do, it’s important to talk to an independent financial adviser before making any major decisions.

Aberdein Considine has a network of independent financial advisers based throughout Scotland. If you would like to speak to one about your circumstances, call 0333 0044 333 or click here.