More than a third of baby boomers plan to keep working beyond the current State Pension Age, according to the latest research.
Those currently aged 58 to 75 will, on average, work for an extra four years beyond their 66th birthday. Half of those still working opt for part-time roles.
While this may not come as a huge surprise – phased retirement has been slowly replacing the traditional “cliff-edge” for years – there are pros and cons to this approach.
Good financial planning can put you in a strong position to make the choice that is right for you. Here are some factors to consider.
The pros of phased retirement
1. Phased retirement could be the answer to a pension shortfall
A robust financial plan aligned to your goals should allow you to retire when and how you choose. But there are external factors that could have a bearing and leave you with a shortfall. Recently, these might have included two years of coronavirus lockdowns and the current cost of living crisis.
Rising inflation diminishes the buying power of your invested pot. While you might consider topping up your pension or re-thinking your retirement lifestyle, continuing in work might be your preferred option.
There are tax issues to consider if you opt for this approach. You can read more about these in the “cons” section below.
2. Part-time work is a brilliant way to maintain an active social life
You might worry about the impact of a cliff-edge retirement on your social life. Going from a bustling office to finding new ways to fill your days might be daunting.
An active social life has health and wellbeing benefits, from keeping you active to preventing loneliness. According to the Campaign to End Loneliness, this is an issue that will affect 2 million over-55s by 2025/6.
Phased retirement means that you can stay in touch with colleagues even as new friendships form.
3. You’ll be able to pass on your valuable wisdom and experience
After a lengthy career, you’ll have built up knowledge of your sector that you’ll likely want to pass on.
You might find that you can engage in consultancy work, set up training courses, or write about your experiences for industry papers or online blogs. Imparting your wisdom to the next generation means that you’ll be making use of your knowledge while influencing and helping younger people.
If the social side of work isn’t important to you, you might even be able to do this from the comfort of your own home.
The cons of phased retirement
1. You might want the traditional cliff-edge retirement
You might have chosen your exact retirement date long ago and have been working toward it ever since.
In this case, having to opt for a phased retirement could be a real blow, and derail your plans.
Everyone’s retirement is different. You might be due to set off on global travels, take up a new hobby (or finally indulge in an old one), or be looking forward to spending more time with your loved ones at the end of a busy career.
Whatever plans you have for your cliff-edge retirement, your long-term financial plan is designed to make them a reality and ensure that financial necessity doesn’t force you into an unwanted phased retirement.
2. You could accidentally trigger the Money Purchase Annual Allowance (MPAA)
Tax relief on pension contributions makes saving for your retirement incredibly tax-efficient, up to a certain limit. This limit is known as the “Annual Allowance”. For 2022/23 it stands at £40,000 (or 100% of your pensionable earnings, if lower).
However, since the introduction of Pension Freedoms legislation in 2015, taking your benefits using certain flexible options could trigger the MPAA. This lowers your Annual Allowance to just ÂŁ4,000.
If you are planning to move into part-time work while still contributing to your workplace pension, you’ll need to factor in this lower limit and its impact on the pension pot you can accumulate.
3. There could be implications for the Income Tax you pay
You pay Income Tax on earnings, including the money you make from working and any pension income you receive.
Taking phased retirement will likely mean paying Income Tax if the amount you receive exceeds the Personal Allowance. For the 2022/23 tax year this stands at ÂŁ12,570.
You’ll need to manage the pension income you take. Taking too much in one go could tip you into a higher tax bracket and increase the rate of tax you pay on a portion of your income.
Get in touch
With decades of experience, our Chartered Financial Planners have the expertise to help you plan your retirement your way. If you have any questions, please get in touch and speak to us today.
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.
