Recent research, published by FTAdviser, suggests that more than a third (38%) of UK baby boomers plan to retire later than the State Pension Age, currently age 66. On average, those aged 58 to 75 will continue working for an extra four years, taking many beyond their 70th birthday.
The research found that while 49% of baby boomers have yet to retire, of those still working, almost half (47%) plan to stay in a part-time role.
You might be considering phased retirement when you give up full-time work, either for monetary reasons or to keep busy and retain your social life.
It can be a great option but it won’t be right for everyone. Here are three factors to consider.
1. Phased retirement could help you to make up a pension shortfall
There are several reasons why you may find yourself with a pension shortfall. You might have:
- Started contributing later in life
- Taken too little risk with your investments
- Turned to professional financial advice too late.
You might opt to increase your pension contributions, rethink the lifestyle you want to live in retirement or keep working in a part-time capacity to supplement pension income.
This allows you to continue paying into a workplace pension too, benefiting from tax relief, and building your pot for when you retire fully.
There are two main issues to consider if you opt for this approach.
The Money Purchase Annual Allowance (MPAA)
For the 2022/23 tax year, you can contribute £40,000 (or 100% of your pensionable earnings, if lower) into a pension and still benefit from tax relief.
This is effectively a 20% government top-up on each contribution you make and as a higher- or additional-rate taxpayer, you can claim back even more. This makes pensions incredibly tax-efficient.
Once you opt to take some of your pension benefits, however, you’ll need to consider the MPAA.
The MPAA is triggered when you access pension funds via certain flexible options and it lowers your allowance to just £4,000. This could severely restrict the tax-efficient contributions you can make, affecting the size of your pot at retirement.
Keep track of your incomings to minimise Income Tax
Both your earnings and the pension withdrawals you make are likely to be subject to Income Tax if you exceed your Personal Allowance (£12,570 for the 2022/23 tax year).
You’ll need to weigh up your part-time income against potential tax charges and also be careful when timing pension withdrawals. Taking too much in one go could tip you over into a higher bracket and unexpectedly increase the tax you pay.
2. You could use your skills to give something back
After a long career, you will likely have built up a vast bank of knowledge in your field. The idea of a cliff-edge retirement – going from a professional role with responsibilities and the excitement of high-pressure situations – to full retirement might be daunting.
Phased retirement might allow you to stay within your sector or industry, possibly in a consultancy role. This ensures that:
- The knowledge you have gained throughout your career isn’t wasted
- You can help the next generation to build on what has gone before
- The transition from full-time work to full-time retirement is a gentle one.
You might also find that your skills are transferable to other sectors.
Age UK confirms that the number of self-employed people over 65 is rising. It has more than doubled in the past five years, with many of these “olderpreneurs” opting to set up their own businesses in retirement.
There are risks attached to this approach, but it could be an opportunity to follow your dreams while providing yourself with a continuing income.
3. Maintaining social contact could have mental health and wellbeing benefits
You might choose phased retirement to help you stay in touch with colleagues and avoid loneliness. If you’re used to a bustling office, a traditional cliff-edge retirement could be a real struggle and affect your wellbeing.
If you worry about missing the social side of working life – being out and about, meeting new people, and staying mentally active – the phased approach might be right for you.
Get in touch
There isn’t one “right” answer and the best approach to retirement will be different for everyone. We can help you to decide on the right option for you and factor that into the retirement plan we put in place.
If you would like to discuss any aspect of your retirement plans, including whether you should opt for a cliff-edge or a phased retirement, please get in touch and find out how our team of expert planners can help.
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.
Workplace pensions are regulated by The Pension Regulator.