More workers approaching retirement are choosing to carry on working in some form. In fact, over half of those over the age of 50 have dismissed the idea of traditional retirement. It’s a trend that could transform retirement and lifestyles in our later years. But there are some key considerations to think about first if it’s a step that appeals to you.

The shift in retirement lifestyles has been relatively quick. When you think about the lifestyle your grandparents, or even parents, aspired to after reaching traditional pension age, it’s likely the focus was on taking it easy. Today, you’re just as likely to see retirees setting up businesses, travelling or trying new hobbies.

Many factors are influencing the decision to carry on working in some way. Key reasons include:

  • Improved health allowing for a more active lifestyle in retirement
  • Longer life expectancy
  • An increasing number of flexible working opportunities
  • Pension Freedoms allowing flexible access to retirement provisions

While for some, financial security will play a role in choosing a phased retirement approach, it’s by no means the sole reason. In fact, research from Aegon suggests the changing mindset on what retirement is can be seen across all income bands.

The research found that just 31% of workers want to go from their usual working pattern to full retirement in one go. Among those shunning the traditional retirement the favoured alternatives were:

  • Working fewer days (70%)
  • Reducing daily hours (44%)
  • Flexible working arrangements (33%)
  • Additional holiday entitlement (20%)

Steven Cameron, Pensions Director at Aegon, commented: “The concept of retirement is changing from traditional to transitional. As people enjoy longer life spans, they no longer yearn to down tools and start retirement in one fell swoop.

“Over 50s in the UK see the appeal of gently easing off the amount of time they work or altering their working pattern. Many see this as having the best of all worlds, benefitting mentally and socially from work, as well as continuing to receive an income, while simultaneously enjoying more leisure time.”

The key areas to think about if you want a phased retirement

If the thought of a phased retirement is an approach that’s attractive to you, there are some essential areas to consider first. As with any life event, it’s important to weigh up your options and carefully consider which route is right for you.

1. What type of work will you do?

The first thing to recognise is that a phased retirement can come in many forms. If it’s something you’re thinking about, setting out your ideal work situation is the place to start.

For some, it may mean continuing in their current role but working reduced hours. In this instance, it’s important to establish whether your employer can offer flexible working arrangements that suit you and whether you’d benefit from any adjustments being made to your position. Approaching your employer with such a request can be daunting, but flexible working arrangements are becoming more common.

If you decide you want to leave your role to try something new, creating a plan is crucial. From taking on a different role to working on a consultancy basis, understanding what you want your phased retirement to look like is essential for success.

2. Will you be able to create the work-life balance you want?

You’ve decided to retire for a reason. Perhaps you want more free time to spend with grandchildren or maybe you want to indulge hobbies. Whatever the reason, it’s likely that you want to shift your work-life balance.

If working 9-5 is no longer appealing, it’s important to think about the balance you now want to achieve. If you don’t, your phased retirement could leave you feeling disappointed and unfulfilled. The optimal work-life balance is different for everyone, so setting out what you want is important. You’ll then need to think about if it’s compatible with the type of work you plan to continue doing.

3. When will you claim your State Pension?

If you plan to work past the State Pension age, you can still claim it while you work. However, if you’re still earning an income, you may decide you don’t need it yet. If this is the case, you can defer claiming your State Pension. This comes with the added benefit of increasing the amount you receive when you do decide to access your State Pension.

For every nine weeks you delay taking your State Pension it will increase by 1%; equating to just under 5.8% if it’s delayed for a year. It’s important to recognise that the State Pension age has been increasing and the level you’re entitled to is dependent on your National Insurance record, you can check your expected State Pension here.

Claiming your State Pension could affect the level of tax you pay while working. As a result, it’s important to look at the level of benefit and whether claiming is the right decision with your plan in mind.

4. Will you supplement your income with retirement savings?

In addition to your State Pension, you may be thinking about accessing other retirement provisions. Typically, a Defined Contribution Pension becomes accessible from the age of 55, for example, and you may also have other savings and investments marked for retirement.

If you still have income coming in from work, will you need to use retirement savings to supplement your income? Your answer will depend on how much you will still be earning and your ideal lifestyle. As a result, thinking carefully about these two areas and whether you could face a shortfall if you relied on wages alone is important.

There are two important things to keep in mind here. The first is that your retirement provisions need to support you for the rest of your life, and once you do fully give up work, you’ll probably need to withdraw a higher income from them. If you do decide to supplement your salary, taking steps to ensure it’s a sustainable amount is important.

The second factor is tax. Money withdrawn from a pension may be liable for tax. Withdrawing from a pension, while earning an income, could mean you end up paying out more if you cross into a new tax band, for example. Calculating the potential tax liability of a decision before proceeding can help you make the most of your money.

5. When will you give up work?

You may have decided to take a phased approach to retirement now, but take some time to consider the long term too. How long do you plan to continue working? Will you phase work out gradually? Answering these questions now can help you set out a retirement plan that suits you.

If you’re ready to retire and want to understand your financial position, we’re happy to help.