The actuarial reduction can impact your decisions about your pension. if you are planning on finishing your career before the normal pension age, whether this is 60, 65, or 66+, depending on the scheme of which you are a member, then a reduction will be applied. Understanding more about this reduction can help you understand if you can afford to retire early or not.
Who is this Actuary?
The role of the actuary is to determine your pension benefits. The actuary analyses data and financial risk and then work out how much the revised benefits should be when a fund is accessed early.
The actuary works on behalf of the pension company. If you live for a long time with a high pension, you are a risk to a pension company, mostly because they could run out of money if you continue to live and draw on your pension. Therefore, the pension company needs to know two things a) how much should they charge you in pension contributions? and b) how long you will live into retirement.
Why apply reductions?
There is a myth in teaching that we will likely live only 18 months after retirement, which is why the government can afford such a generous pension scheme.
However, teachers are part of an above-average social and economic group. This means they are likely to live on average 18 years beyond the age of 65 years. This means if you retire earlier, you are more likely to have money; actuarial data would suggest you would live longer and, therefore, you would receive benefits for longer. This means they need to apply a reduction to the pension to ensure that the scheme continues to be viable.
Conclusion
Understanding that your pension benefits will be lower if you retire earlier can naturally impact your ability to retire. A lower monthly amount could result in struggles to maintain your lifestyle as you grow older. It is a good idea to seek advice from an independent financial advisor before making your decision to retire.
The content in this article was correct on 26th August 2022. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on pensions for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you. The value of your investment can fall as well as rise and is not guaranteed.