If you’re anxious about your retirement finances, don’t worry – you’re not alone. Indeed, Investec found that 56% of people with stock market investments are concerned they do not have enough for retirement[1].
Perhaps it’s no surprise then that an increasing number of people are now pursuing a “phased” or “flexi” retirement – where you move to part-time or consulting work as you near or reach retirement age. In a study, Aviva found that 40% of 55- to 64-year-olds planned to move to flexi-retirement before they turned 65[2].
By working for longer, you could continue to earn and perhaps build your retirement savings, boosting the longevity of your later-life income. As well as financial benefits, taking a more gradual approach could also support your emotional wellbeing. Read on to learn more.
A phased retirement offers a variety of emotional and financial benefits
You may decide to pursue a phased retirement for both financial and emotional reasons.
Continue to enjoy the emotional benefits of working
When you look back on your career, many of the highlights are likely to be moments shared with colleagues, whether that be collaborating on a big project or chatting over a few after-work drinks. Work provides an important social environment that could positively contribute to your mental health and wellbeing.
As you approach retirement age, these interactions are perhaps even more essential. Age UK reports that meaningful social activities help older people maintain their thinking skills in later life[3].
A phased retirement may allow you to maintain valuable social contact as you transition into the next stage of your life. You could continue to socialise and collaborate with colleagues while also having more time to pursue other interests – a potential win-win for your mental health.
Help your savings last longer
Bar a blip caused by the Covid pandemic, life expectancies in the UK have been rising for decades.
For example, according to the Office for National Statistics (ONS), a 55-year-old woman can expect to live to 87 and has a 1 in 4 chance of living to 95. A man of the same age has a life expectancy of 84 and a 1 in 4 chance of living until the age of 92[4].
As a result, you could enjoy a longer retirement than your parents and grandparents. However, rising life expectancies may also mean your retirement savings will need to support you for several decades.
By transitioning to part-time work in later life, you could support your ideal lifestyle without depleting your pension as quickly.
Additionally, you could continue to make regular contributions and benefit from tax relief. Plus, if you’re employed, you’ll also receive employer contributions, adding another welcome boost to your pot.
And this isn’t the only financial implication of taking a phased retirement.
Key financial considerations to make before you flexibly retire
While dropping down to fewer hours in later life could allow you to earn for longer, you’ll almost certainly see your salaried income fall. This might mean you need to top up your money from elsewhere.
Your pension
Your pension is likely to be one of your largest assets, so using it to top up your income may seem the obvious choice.
“Flexi-access drawdown” allows you to withdraw some of your pension while leaving the rest invested to potentially grow in value. However, if you begin taking a flexible income from your pension, it could hamper the tax-efficiency of later contributions.
Normally, your pension Annual Allowance is £60,000 (2024/25), or 100% of your annual earnings, whichever is lower. This is the amount that you can save tax-efficiently in your pension. You can contribute more than the Annual Allowance, but your payments won’t benefit from tax relief.
However, if you flexibly access your pension, the Annual Allowance is replaced by the Money Purchase Annual Allowance (MPAA). This limits your tax-efficient pension contributions to just £10,000 (2024/25) a year.
Typically, the MPAA won’t be triggered if:
- You move your pension into a flexi-access drawdown scheme but don’t start drawing an income
- You only access your tax-free lump sum, usually 25%
- Your pension is valued at less than £10,000
- You buy an annuity.
It’s also important to consider the tax implications of taking an income from your pension – you may have to pay Income Tax on your withdrawals. The amount of tax you pay will depend on how much you withdraw and the income you receive from other sources.
The rules around tax and the MPAA can be complex. If you’re concerned that this may affect you and your long-term financial goals, please get in touch.
Savings and investments
Instead of your pension, you could use savings or investments to top up your retirement income.
If you choose to use your savings, remember that it’s usually a good idea to keep an emergency cash fund. Typically, this fund should cover between three and six months of your regular expenditure.
So, if you do opt to use some cash savings, make sure you keep your emergency fund intact.
Alternatively, you could liquidate investments to provide extra income as you reduce your working hours.
While this could deliver a useful source of cash, there are some considerations you should make before selling any holdings:
- You could stop benefiting from compound returns. Once you liquidate your investments, you may miss out on any future returns or dividend payments.
- You may have to pay tax on your profits. If you hold investments outside an ISA wrapper and they’ve grown in value since you bought them, you may have to pay Capital Gains Tax (CGT) on the profits – if they exceed the CGT Annual Exempt Amount of £3,000 (2024/25).
If you plan to use your savings and investments to support your lifestyle as you begin to enjoy a phased retirement, we can help you do so in a tax-efficient and sustainable way.
Speaking with a financial planner could help you decide if a phased retirement is right for you
A financial planner can help you understand all the financial and emotional benefits of a phased retirement.
They will assess your current situation and advise when you could comfortably start to reduce your working hours. They will then help you devise a sustainable income strategy using your savings, investments, and pension.
Additionally, we can ensure you access your wealth tax-efficiently and don’t deplete other essential savings, such as your emergency fund, as you move on to your next adventure.
Get in touch
To discover how we can help you achieve your dream retirement, email info.wp@titanwh.com or call us on 0800 048 0150.
Risk warnings
The information contained in this article is based on the opinion of Titan Wealth Planning and does not constitute financial advice or a recommendation for any investment or retirement strategy.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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 performance.
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.
[1] https://www.investec.com/en_gb/wealth/about-us/press-office/people-worried-about-running-out-of-money-in-retirement.html
[2] https://www.aviva.co.uk/aviva-edit/your-money-articles/Understanding-flexi-retirement-could-it-be-right-for-you/
[3] https://www.ageuk.org.uk/information-advice/health-wellbeing/mind-body/staying-sharp/looking-after-your-thinking-skills/social-connections-and-the-brain/
[4] https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07
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