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16 Feb 2018

Ask an expert: 'Can I access my final salary pension fund at 55?'

Schemes can set their own rules on pension age

Every week, Which?'s money experts answer your financial queries. You can submit your questions to money-letters@which.co.uk, or via our Facebook or Twitter pages.

Q. I'm a deferred member of the London Pensions Fund Authority, having left in 2008. I recently enquired about accessing my pension, which I understand is possible from the age of 55.

However, I was told that it does not apply to this scheme, and the earliest I can take the pension is at age 60. Is this correct?

Submitted via Which? Money magazine.

A. The minimum age at which you can take money from a pension may be 55, but pension companies are able to set their own rules.

There are pros and cons to tapping into your pension pot early.Which? explains at what age you can access your pension and the factors you should take into account.

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When can I access my pension?

The age at which you can access your pension will depend on the type of scheme you're paying into.

The schemes will set their own rules for accessing the pension pot, and that may include a higher age threshold.

If you're in a defined contribution (DC) pension, you can generally access your money at 55. At this point, you'll be able to withdraw up to 25% of your pension tax-free.

But it's a little more complicated if you've paid into a defined benefit (DB) scheme, also known as a 'final salary' scheme.

Taking benefits from a final salary pension

Under a defined benefit pension, you'll receive a portion of your salary based on the number of years you paid into the scheme.

These schemes will set an age at which you can start taking the full benefits from your pension - known as the 'normal retirement age'.

This age will vary depending on the pension scheme you're enrolled in, and when you joined the scheme.

As an example, the NHS pension scheme is divided into different groups, with most members falling under the '2015 section'. For these members, the normal retirement age will be the same as their state pension age.

Other members remain under the older 1995 or 2008 sections; their normal retirement ages will be 60 and 65, respectively.

Under the Teachers' Pension Scheme, members in the final salary scheme will generally be able to access their benefits at 60 if they joined before 1 January 2007, or 65 if they joined after.

For your fund - the London Pensions' Authority scheme - your retirement age will be 65 if you joined prior to 2014, though it may be possible to access your pension at 60 if you joined before 2008 in certain circumstances. For members who joined after 2014, their normal retirement age will be tied to their state pension age.

Taking a lump sum from a final salary pension

If you want to access a lump sum, this will have an impact on the payout you receive for the rest of your retirement. The amount you're allowed to take as a lump sum, and the impact it will have on your future payments, is determined by the 'commutation factor'.

Essentially, the commutation factor tells you how much income you'd lose by taking a lump sum. So, if you have a commutation factor of 12, you'd give up £1 for every £12 of lump sum you took.

The commutation factor is worked out by the scheme's actuary, based on HMRC's rules on the maximum amounts you're allowed to withdraw.

As an example, let's sayyou have an annual income of £20,000 from a defined benefit pension with a commutation factor of 12. Using common calculations, you'll typically be able to take a tax-free lump sum of £85,714 and be left with an annual pension of £12,857.

What to do if you want earlier access to your final salary pension

If you'd like to access your final salary pension earlier, you may be tempted to transfer to a 'defined contribution' pension.

This is likely to give you more flexibility, but there are risks involved, and you should think very carefully about the benefits you're likely to lose.

A final salary pension offers you guaranteed income in retirement. Your income will keep pace with inflation, and will be protected from market downturns - unlike a defined contribution pension, which will be tied to underlying investments.

If you decide to transfer your final salary pension, the amount you'll receive is called the 'cash equivalent transfer value'. Essentially, the provider will determine how much it would need to hold today to cover the benefits you, or your spouse, would be entitled to receive in future.

You'll then need to reinvest this money intoa pension scheme with another employer, a personal pension, a stakeholder pension or a buy-out contract.

Seeking advice on pension transfer

If your final salary pension benefits are valued at more than £30,000, you're obliged to speak to a financial adviser before transferring. But choose your adviser carefully. The Financial Conduct Authority warned recently that some companies are recommending transfers without making sure it's a suitable strategy.

As a general rule, your adviser should specialise in transfers andhold a G60 or AF3 advanceddiploma in financial planning, or equivalent.

Keep in mind that you might lose valuable benefits by transferring out of a final salary pension, so make sure you fully understand your options before making a decision. You can find out more in our guide totransferring your company pension.