On the surface flexible retirement may seem like an attractive option for many, but it is important to weigh up the practicalities
Flexible retirement – reducing the hours you work and boosting income by drawing on pension benefits – seems an increasingly attractive concept for those who are aged 55 or over. The idea is that you get the opportunity to take life slightly easier, without giving up the structure and companionship of employment. Crucially, flexible retirement allows you to continue earning a salary, and any gap in earnings can be filled by drawing on one or more of your pensions.
But is this a realistic way to approach retirement? Steve Webb, Director of Policy at Royal London and former Pensions Minister, thinks that many people have insufficient pension savings to make flexible retirement practical: “For people with modest means, drawing your pension, especially your state pension, on the day on which it becomes due could be a killer.
“As soon as you do that, you’ve got very little hope of building enough savings from the income you are earning by working part-time and late in life to give you a good standard of living.”
Royal London’s The ‘mirage’ of flexible retirement report indicates that, far from bringing retirement closer, many people could find themselves forced to work for many more years – or to live on an inadequate income – if they reduce their hours at their normal retirement age, let alone earlier.
For people with modest means, drawing your pension, especially your state pension, on the day on which it becomes due could be a killer
For someone wanting a ‘silver standard’ retirement, with an income worth half their pre-retirement income and protection against inflation, switching to part-time employment at state pension age might mean they have to work for a further five or six years. If they want a ‘gold standard’ retirement, with an income equivalent to two thirds of their pre-retirement income, protection against inflation and provision for their spouse after their death, they might have to work part-time up to the age of 85.
However, even if you are in your fifties, sixties or older, there are still ways you can improve your financial prospects once you retire. You may be able to continue contributing to your private and occupational pensions. There is less time for your money to benefit from stock market growth, but your contributions will benefit from tax relief at the highest rate of tax you pay. For more information about how much you can invest visit the Pensions Advisory Service.
It is also wise to keep an eye on exactly how much you are withdrawing from your pension pot, and the consequences of doing so. The government has recently announced that it may limit the tax-free amount you can invest in pensions to £4,000 a year if you have accessed your pension pot. The change will be applied retrospectively from 6 April 2017, so anyone who has drawn on the taxed part of their private or occupational pension will be unable to make a contribution of more than £4,000 a year from that date. However, you can still take your tax-free lump of cash without triggering the £4,000 contribution limit.
The best way to ensure you have sufficient income in your later years is to start contributing to a private or occupational pension as soon as you can. This not only enables you to make plenty of contributions, it also gives your money time to grow.
If you are member of an occupational pension scheme, your employer may be prepared to match any extra money you pay in over and above the minimum contributions required.
You can also make a significant improvement to your state pension by deferring the benefits. Your state pension will increase by 5.8% for every year that you delay receiving your benefits. For someone who was entitled to the full new state pension of £159.55 a week in the 2017–2018 tax year, this would have meant an extra £479 a year.
“You need to ask yourself the question: could I make it work to delay taking my state pension a bit?” says Steve. “If you can, then you may be able to make up for reaching your fifties with modest savings.”
To find out more about delaying your state pension visit: https://www.gov.uk/deferring-state-pension.
Pensions are complex and their rules change frequently. If you have any concerns or questions about investing in a pension, it is a good idea to seek help from an independent financial adviser.
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