A recent Aviva report has found that semi-retirement is set to rise in the UK, as retirees continue working with reduced hours in the run-up to State Pension Age.
The shift from a traditional cliff edge to a phased retirement has been ongoing for years, and its popularity is showing no signs of slowing.
Figures suggest that 80% of over-65s “like the idea” of working through retirement. Of those that have already chosen to reduce their hours, a massive 91% consider themselves “much happier” after the move.
There are pros and cons to phased retirement and some important factors you’ll need to consider if you’re to manage your move successfully.
Here are just five of them.
1. You’ll need to know where your pensions are
Last year, you might have read ‘3 compelling reasons to consolidate your pensions now’ in which we explained how to find your missing pension pots.
Tracing your lost pensions – and ensuring that you know how much they are worth – is crucial if you’re budgeting for a phased retirement.
According to a report from MoneyAge, 28% of the UK workforce have three or more pension pots. But do you know where yours are?
Use the government’s pension tracing website to find your pensions and gain a full picture of your retirement wealth before you make any decisions.
2. Beware the MPAA if you intend to withdraw benefits
If you intend to subsidise your lost employment income by withdrawing from a pension, you’ll need to think carefully about the retirement option you choose.
This is especially true if you intend to withdraw from one pension while continuing to pay into another – your workplace scheme, for example.
If you opt for certain “flexible” retirement options available under Pension Freedoms legislation, you might fall foul of the Money Purchase Annual Allowance (MPAA).
In most cases, you receive tax relief on pension contributions up to the Annual Allowance of £60,000 (for the 2023/24 tax year). Triggering the MPAA, though, reduces the value of the tax-efficient contributions you can make to just £10,000 a year.
Being aware of the MPAA should help you to avoid triggering the MPAA accidentally. Get in touch before you make any retirement decisions and we can help to ensure it is the right choice for you.
3. Consider deferring your State Pension if you can afford to
The current State Pension Age is 66 (rising to 67 between 2026 and 2028) but that doesn’t mean you have to start taking it the moment you reach this age.
Not only can you defer your State Pension, but it is simple to do and will result in you receiving a higher regular income when you do eventually claim.
If you want to defer your State Pension, simply don’t claim it when you reach State Pension Age and the deferment process will start automatically.
The full new State Pension increases by 1% for every nine weeks you defer, equivalent to around 5.8% each year (or around £540).
If you reached State Pension Age before 6 April 2016, you’ll be due to receive the Old State Pension, which increases by 1% for every five weeks you defer (around 10.4% a year).
If your semi-retirement income means you don’t need to claim your State Pension, deferring it could make a huge difference when you later claim.
4. You can pass on your skills in a reduced role
After a long career, you will no doubt have a lot of expertise to pass on, and friends and colleagues that you will miss.
Phased retirement could allow you to pass on this expertise to the next generation, while also meaning you retain your social life.
This is a huge benefit of phased retirement compared to the traditional cliff edge. It allows you to ease yourself into a new life post-work, maintaining decades-long routines and friendships, while smoothing the transition to full retirement.
5. Think about how phased retirement changes your options
Retiring later, and retiring while you’re still at work, could change your plans, especially if you make the decision relatively late.
You might opt to withdraw some of your tax-free cash entitlement via flexi-access drawdown. This could help make up for the portion of your income you have lost or help fund projects you have time for now that you aren’t working full time.
Regular income is important in retirement. It replaces your regular wages and allows you to budget easily for fixed and known expenses.
But phased retirement might allow you to hold off on taking an annuity if that’s an option you are considering. Opting to take an annuity only when you fully retire means that your pension pot will be invested for longer – and hopefully achieve additional growth. You will also likely find that the level of regular income your provider offers increases with age.
Get in touch
If you’d like to discuss your phased retirement options, or you have any other questions about your long-term financial planning, contact us now to find out how our Chartered financial planners could help you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
