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Pension decision time for those approaching 50

Anyone fortunate enough to be contemplating an early retirement may have to make a decision on when they stop work sooner rather than later.

As from 6 April 2010, the minimum age at which people can draw their private pensions will change, with the age rising from 50 to 55.

The change could affect up to four million: the one million who will reach 50 during the next year and the three million who are already aged between 50 and 54.

Anyone who chooses not to draw on their private pensions before 6 April will not be able to do so until 2015 thereafter.

There is no obligation to draw on all the funds in a pension pot, and some of those who do will be able to continue to work and make contributions to their retirement savings.

One argument for dipping into a pension early is that the tax-free lump sum part of the fund (25 per cent of the worth of the entire fund for personal pensions) can be used to add a little leeway to personal finances at a time when money may be tight. The sum could help to wipe out any amount owing on a mortgage, for example.

Whether you can unlock some of your pension and still carry on saving and working will depend in part on the sort of pension you hold.

Personal and stakeholder pensions offer the greatest freedom. Company pensions are more restrictive with just 10 per cent giving members the opportunity to extract a tax-free lump sum before they actually retire.

For anyone in the position to do so (setting aside those who can genuinely afford to put their feet up at 50 and not worry about the future), unlocking their pension funds may look attractive. There are, though, dangers.

Buying an annuity or shifting pension funds into an income-drawdown scheme, as you would have to with the remaining 75 per cent of a personal pension pot, may mean that your fund does not grow at a rate sufficient to cover your annual income withdrawals. Remember also that, by drawing early, the annual retirement income delivered by a pension will probably not match the sums that would have been available had you continued to save until you were older.

Pension unlocking is a complex area, and anyone thinking about a decision before the rule changes come into effect must take professional advice about the most sensible course of action.