Why a phased retirement might be right for you

November 2022
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Your retirement is one of the key milestones in your life. 

As the culmination of your working career, that could easily amount to at least 40 years, it’s also something you’ve probably been planning for and looking forward to for some time.
You may well have a specific date in mind for your retirement – maybe a landmark birthday or another key event that you want to align with the end of your working life.

However, an increasing number of people are either delaying their retirement or planning to continue working in some form, even after they start drawing from their retirement savings. 

This is often described as “phasing” your retirement. 

Read on to find out why phased retirement is on the rise, and whether it might be right for you.

An increasing number of people are working in retirement

According to figures published in the Independent, two-thirds of people planning to retire in 2022 are now expecting to continue working in some form or another in their retirement. 

This figure is rising year-on-year, up from 34% in 2020 to 56% in 2021. Furthermore, it’s estimated one-third of people currently employed will work beyond the current State Pension Age of 66 – some to age 70 or over. 

Nearly half of those planning to continue working are intending to cut their hours and work part-time, with 23% saying they’ll continue working full-time. 

The cost of living crisis is creating financial challenges for many

According to the same report, nearly a third (31%) of those opting to continue working in retirement this year are doing so due to financial necessity. 

If you’re self-employed or own your own business, there’s a good chance that your income took a hit during the initial couple of years of the Covid pandemic because of the associated lockdowns and restrictions on movement and travel. 

Since then, rising inflation and the cost of living crisis have left many UK households facing financial challenges. 

Such challenges, including reduced income and increased expenditure, could easily necessitate delaying your retirement. The situation could also be exacerbated by stock market uncertainty, which may have affected the value of your pension fund. 

The transition from work to retirement can be daunting

The move from working to stopping work isn’t necessarily easy, either. 

The sudden upheaval of being a full-time employee on a Friday to a life of no work at all on a Monday can be a difficult adjustment. This could be especially true if you’re in a busy, stressful role, and used to high pressure and constant deadlines.

Much of your social life may well be based around work. And your working schedule will probably also dictate your holiday time and, possibly, how you spend your weekends, too. 

Work is likely to have been a key part of your life for 40 years or more. So, it’s no surprise that the Independent report also suggests that 32% of those opting for a phased retirement in 2022 plan to do so to keep busy.

So, why not consider phasing the move from work to retirement, rather than jumping in straightaway?

There are various options when it comes to phasing your retirement

One outcome from the pandemic has been the positive experience many people have had working from home. What was seen as a necessity during lockdown, is now viewed by many as an attractive alternative to the daily chore (and expense) of commuting to a busy office. 

It could well be the case that you’ll be happy working part-time at home if it means you can extend your career and maintain a regular income.

Staying employed in some capacity can be a great way to maintain a social life while beginning the transition into full retirement, too. 

Many companies will welcome someone with industry or sector experience in a reduced role, where they can act as a mentor and share their experience with others in the business. 

You may have been planning an immediate retirement date for years and have extensive plans and hobbies already lined up. But if you haven’t, reducing your hours and phasing your retirement might be a good option.

Phasing your retirement could give you best of both worlds

Staying in work can be a great way to supplement a private pension or income from investments. It also leaves the potential for you to continue making tax-efficient contributions into a workplace pension scheme. 

Maintaining an income stream from work, can also help your retirement fund go further since you’ll be putting less strain on it during some years of semi-retirement.

Receiving an income and enjoying an easier work routine, could mean you’re able to simultaneously start ticking off some items from your retirement bucket list.
You’ll also be keeping your mind active and maintaining some of the social and lifestyle aspects that can make work rewarding. 

Potential tax issues mean it’s important to get advice

There are two main tax issues to consider if you’re planning a phased retirement:

1. The amount you can tax-efficiently contribute to your pension is reduced
Tax relief makes pensions an attractive way to save. However, there are limits to your Annual Allowance – the amount that can be paid into your pension each year that still qualifies for tax relief. 

If you opt to start drawing a regular income from your pension fund – rather than just tax-free lump sums – your Annual Allowance will be reduced from £40,000 to just £4,000. 

If you’re looking to contribute more than this to your retirement savings, it may be worth looking at other tax-efficient saving options such as ISAs.

2. Your pension income could take you into a higher tax bracket
Apart from your tax-free cash entitlement, all your pension withdrawals will be taxed as though they are earned income. 

You should therefore be aware of your total earnings from all sources as wage rises could move you into a higher tax bracket. 

Also, be careful if you’re taking large sums from your pension fund, as these could result in you paying more in Income Tax than you may have anticipated. 

It’s important to plan your income carefully to ensure you’re minimising the amount of tax you’re paying as far as possible. So, it’s a good idea to speak to your financial planner about how you can best plan your finances to help you make the most of your longer working – and earning – life. 

Get in touch

Regardless of your plans for retirement, financial advice can be crucial to ensure you meet your goals and enjoy the retirement you deserve. 

If you want to talk through your plans, please get in touch. You can email us at clientenquiries@lebc-group.com or call us on 0800 055 6585.

Please note
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.

Workplace pensions are regulated by The Pension Regulator.

Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.

Levels, bases of, and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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