Taking a final salary pension early: how the reduction works

A final salary (defined benefit) pension has a normal pension age set by the scheme, often 60 or 65. Most schemes let you take it earlier, but cut the pension for each year it's paid early, because it will be paid for longer.

Worked example: a pension of £16,000 a year at 65, taken at 60 with a cut of 4% for each year early. The calculator includes it alongside a workplace pension and savings. Your money lasts to 95, with £148,011 left.

The reduction in this example

Five years early at 4% a year is a 20% cut, so £16,000 a year at 65 becomes £12,800 a year from 60, in today's money. The lower amount is paid for life and then rises each year by the scheme's increases. Each scheme sets its own reduction, so your scheme's figures are the ones that count.

When the later pension catches up

Taking it at 60 pays five extra years. Waiting until 65 pays more each year. Adding up the pension year by year in today's money, the full pension from 65 catches up with the reduced pension from 60 at about age 84. That's before tax, and the calculator includes tax.

In this example, the whole plan lasts to 95 with the pension from 60, and lasts to 95 with it from 65.

Taking a tax-free lump sum

Most schemes let you swap part of the pension for a tax-free lump sum, at a rate the scheme sets, called the commutation factor. This example uses £12 of lump sum for each £1 a year of pension given up. Taking the most allowed at 60 gives a lump sum of £54,857 and a pension of £8,229 a year, in today's money. The plan then lasts to 95. Tick "Swap some pension for the maximum tax-free lump sum" on the pension in the calculator to try it.

Other things to know

• Earliest age. The earliest age to take a pension rises from 55 to 57 on 6 April 2028, unless your scheme gives a protected pension age.
• Tax. Final salary pension income is taxed as income. The lump sum counts towards the £268,275 limit on tax-free cash across all your pensions.
• The state pension gap. Taking it at 60 still leaves years before the state pension, which the calculator shows as bridge years.
• Transfers. A final salary pension pays a guaranteed income for life. Transferring it out gives that guarantee up, and if it's worth more than £30,000 the law requires regulated financial advice before a transfer.