5 important questions to ask yourself before deciding to delay retirement

The cost of living crisis has dominated headlines in the last year, and you have likely noticed the effect on your own finances. Many of us are all dealing with high energy bills, increased mortgage or rental payments, and rising food costs.

Not only does this make it more difficult to meet your short-term financial obligations, but it may also mean you have less to contribute to savings and investments each month.

As a result, this additional pressure on people’s finances is causing many to rethink their plans for retirement. Additionally, people are concerned that inflation will reduce the spending power of their money, so they will deplete their retirement savings too quickly.

Indeed, research by Zurich found that 1 in 5 older workers have delayed their retirement so they can boost their savings and ensure that they can fund their lifestyle in retirement. 

A further 1 in 10 people are opting to continue working because volatile stock markets have affected the value of their savings. Consequently, they want to wait until markets potentially recover and the value of their investments grows again.

You may be thinking about changing your retirement plans for the same reasons, and changes to pension regulations in the spring Budget could make delaying more attractive.

Previously, the Lifetime Allowance (LTA) limited the amount of wealth you could build in your pension without facing a tax charge when withdrawing the funds. 

However, the government removed the tax charge in the spring Budget and they have plans to abolish the LTA altogether in the future.

Additionally, the Annual Allowance – the amount that you can save in your pension each year without an additional tax charge – increased from £40,000 to £60,000.

These changes could mean that you have more opportunities to build your pension savings tax-efficiently if you continue working for longer.

That said, delaying your retirement may not always be the right choice. That’s why it is important to evaluate how working for longer will affect your overall financial plan. You may also want to consider whether it will improve your quality of life in retirement or not.

Here are five important questions to ask before deciding to delay retirement.

1. What kind of lifestyle do you want in retirement?

Your goal when saving for retirement is likely to be able to generate enough income to fund the lifestyle you want when you decide to stop working. As such, thinking about what that lifestyle looks like and what level of income you need to achieve it is a good place to start when deciding whether to delay retirement.

If you already have enough in your retirement savings to fund your desired lifestyle, what do you stand to gain from working for longer?

You may simply be shortening the amount of time you have to enjoy your retirement. On the other hand, if you don’t have enough in your savings to achieve your goals in later life, then delaying retirement may be a sensible choice.

2. How much could your pension savings grow?

Next, you may want to consider how much your savings could grow if you continue working and contributing to your pension. 

Most importantly, decide whether this increase makes it worthwhile to potentially shorten your retirement.

There are several factors to consider here including your own contributions and any employer contributions you receive. A financial planner can use cashflow planning to help you see how much your pension could grow in a given period if you continue working and making contributions.

You may find that a few extra years’ worth of contributions would be enough to help you achieve the retirement that you want. In this case, delaying your retirement may be the right choice for you.

But if you need to contribute for another decade to achieve growth that would improve the quality of your retirement, you may reconsider.

3. How will you generate an income from your pension savings?

Your decision about delaying retirement could depend on how you plan to generate an income from your pension savings. You may transfer your pension into drawdown or use your savings to buy an annuity, for example.

If you plan to buy an annuity, you risk missing out on favourable rates if you wait too long. This is because, while annuity rates are currently at their highest level in 14 years, according to Legal & General, there is no guarantee that they will remain this high.

As such, if you purchase one soon, you can benefit from these rates and may receive a higher income in retirement as a result. However, if you delay your retirement, there is a chance that annuity rates will drop in the future and you could miss out.

4. How are your pension savings invested?

Typically, pension funds are moved into low-risk investments as you approach retirement. This may offer more protection against market volatility and maintain the value of your pension pot when you come to draw from it.

However, if you plan to delay your retirement, you may want to take a different approach so your savings have more potential for growth.

Whether you decide to delay retirement or not, it could be useful to review where your pension savings are invested. If necessary, you can make changes to ensure you adopt a level of risk that aligns with your retirement plans.

5. Could semi-retirement work for you?

If you want to continue building your retirement savings, but you also want more free time to enjoy yourself, semi-retirement may be an option.

This is becoming more popular as people look for ways to shore up their savings and account for the cost of living crisis, while also enjoying their retirement. Indeed, Aviva reports that 44% of 55- to 64-year-olds plan to move into semi-retirement.

You may want to take this option instead of delaying your retirement altogether. However, if you do decide to do this, you may need to consider how the Money Purchase Annual Allowance (MPAA) affects you.

The MPAA is triggered once you start drawing flexibly from a defined contribution (DC) pension. It effectively reduces your Annual Allowance – the amount you can contribute to your pension each year without an additional tax charge – to £10,000. 

Consequently, you may not be able to make as many tax-efficient contributions to your pension as you could before. That said, you may still benefit from working part-time and making some pension contributions, provided you do not exceed the MPAA.

It may be useful to work with a financial planner to understand how the MPAA affects you and ensure that your wealth is as tax-efficient as possible in semi-retirement.

Get in touch

If you think that delaying retirement may be the right choice for you, we can give you some valuable guidance.

Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.