Traditional retirement once meant ending your career on a set date, moving straight from full-time work into full-time retirement. This so-called ‘cliff-edge’ retirement could take a lot of adjusting to. It wasn’t very flexible either.
Moving to part-time, or into the voluntary sector, before giving up work completely was once seen as a second choice if it was considered at all. Phased retirement might even have been viewed as an admission that you hadn’t saved enough.
Recent Office for National Statistics (ONS) figures confirm 10.7 million over-50s are currently in work. Aegon research in 2019 suggested that half of UK workers over 50 are now shunning ‘cliff-edge’ retirement.
So why is phased retirement increasingly popular? And is it right for you?
Three reasons to consider phased retirement
1. Supplementing your retirement income
The first reason to consider phased retirement is from financial necessity. If you find yourself with a pension shortfall you have several options: work for longer, downgrade your retirement plans, or find a way to supplement your income.
By moving to a part-time role with your current company you can make use of the skills built up over your career. You won’t need to retrain, and you’ll likely be able to continue contributing to your workplace pension too.
You could begin drawing a pension from a scheme you hold elsewhere and use the income from your job to supplement that pension.
You might also be able to use other income – investments, Buy to Let properties – to cover fixed expenses. You could then use your supplementary income to help toward discretionary expenditure.
As you begin to make up your pension shortfall, phased retirement will gradually become the full retirement you dreamed of.
2. Allowing you to prepare mentally
If you have been working full-time for the entirety of your career, the thought of a cliff-edge retirement might be concerning.
What will you do with your days? Will you get bored? Where will you find a comparable sense of purpose?
Phased retirement gives you the time to prepare mentally for the transition into your retired life.
You will have time off to get used to being at home – to start doing the things you’d dreamed about doing once your career was over. This could be spending more time with the grandchildren or taking up a new hobby, for example.
But you’ll have the mental stimulation of work, as well as a schedule and routine to maintain. This will keep you physically active and connected to your former life.
For some, retirement might be a lonely proposition. Phased retirement can help you keep socially active too. Days in the office might mean meeting up with friends that have been a part of your working life for many years.
This can make the mental transition to full retirement much easier.
3. Work-life balance
Moving to a part-time or a consultancy role with a company you have been at for some time is a great way to make use of your acquired knowledge while preparing you for retirement.
You can find a work-life balance that suits you.
You might find that when the financial necessity is gone you want to continue working anyway. You might consider a move into the voluntary sector. Volunteering can be a great way to maintain a sense of purpose, to remain physically active, and to continue to have an active social life.
Things to bear in mind
- The Money Purchase Annual Allowance (MPAA)
The Annual Allowance is a limit on the amount you can contribute to your pension plans and still receive tax relief.
Currently, the Annual Allowance stands at £40,000 but it could be lower depending on your salary – this is known as the Tapered Annual Allowance.
Your allowance may also fall once you start accessing your pension benefits. Making use of Pension Freedoms to take your pension in a ‘flexible’ way could trigger the MPAA.
The MPAA is just £4,000 a year, which means that if triggered, the amount you can contribute to your pensions while benefiting from tax relief falls to that amount. If you plan to take pension benefits while continuing to contribute to other schemes, you’ll need to be aware of this.
The MPAA isn’t always triggered when you take pension benefits. It won’t normally be triggered if you:
- Only take a tax-free sum, usually 25%
- Purchase an Annuity
- Opt for a Flexi-Access Drawdown scheme but haven’t yet withdrawn an income from it
- Have pension funds valued at less than £10,000
The MPAA rules can be complex. If you’re unsure if your planned retirement will trigger the MPAA, get in touch.
- Income Tax
You’ll also need to be aware of Income Tax. The Personal Allowance is currently £12,500. This is the amount of income you can receive before tax becomes due.
Any income you receive – be it from your job or pension – is combined when calculating your Income Tax liability, so be aware of the amount you receive.
If you opt to take pension withdrawals, be sure to keep track of them. You could accidentally move into a different tax bracket. If so, you might end up paying much more tax than expected.
Get in touch
Please get in touch if you have any questions about phased retirement. We’re here to help.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation which are subject to change in the future.