How do you intend to spend your retirement?
It’s one of the key financial planning questions, and one around which many financial plans are built. You might have grand plans to travel the world or spend more time on your hobbies or with your loved ones.
However, in recent years there has been an increasing trend towards “phased” or “flexi” retirement. Unlike previous generations that might have finished work on a Friday afternoon and woken up “retired” on a Monday morning, more and more people are choosing to retire on their own terms.
According to new research by abrdn, of those people planning to retire in 2022, two-thirds (66%) plan to continue working in some capacity.
Colin Dyer, client director at abrdn, said: “Gone are the days when everyone had a set date or a set age from which they’ll never work again. The emerging trend for ‘flexi-retirement’ for financial reasons, or just to keep busy, is here to stay.”
So, is “flexi-retirement” right for you? Read on for some things you should consider.
The 2 main reasons retirees want to keep working
According to Aviva, almost 1.4 million people are working beyond the traditional retirement age of 65 – an all-time high and nearly triple the number in 2000.
Abrdn say that there are two main reasons why retirees want to keep on working in some capacity.
To boost their income
In a world where inflation is at a 30-year high, you may be concerned about how far your pension fund will stretch when you come to retire. So, one of the common reasons for phasing into retirement is that you can supplement your retirement income through work.
Of those people planning to retire in 2022, the abrdn research says:
- 24% intend to go part-time at either their current or a new employer
- 15% expect to continue working for their own business
- 14% want to do some volunteering
- 12% want to start their own business.
Reducing your hours may enable you to boost your income while still being able to spend time with family, on the golf course, or pursuing your own interests. Or, perhaps you can offer the benefit of your experience and wisdom in a teaching or consultancy role?
To keep busy
Many people who decide to fully retire find that, in time, they miss either the structure of work, or the social benefits. So, they decide to return to work to “keep busy” or because they enjoy the interaction with colleagues and clients.
The financial implications of phased retirement
If you’re thinking of continuing working, there are some financial implications.
Be careful of paying unnecessary Income Tax
Firstly, you need to carefully manage your pension withdrawals to avoid paying unnecessary Income Tax.
If you can, you should spread your withdrawals throughout the year, and over several tax years, to benefit from your tax-free allowances. If you can, avoid unnecessary or large one-off withdrawals as, when combined with your earned income, these could push you into a higher Income Tax bracket.
If you have built up tax-efficient savings alongside your pension (for example, in ISAs), it can be beneficial to draw income from these before you draw your pension. That’s because any money withdrawn from ISAs is typically free of both Income Tax and Capital Gains Tax.
In addition, pensions don’t typically form part of your estate when you die, unlike other types of savings such as ISAs, unit trusts, or shares. So, depleting your other savings first could mean you reduce a potential Inheritance Tax (IHT) liability on your estate.
Beware of the “pension dipper tax trap”
Additionally, if you continue to work when you draw your defined contribution pension flexibly, you’ll be limited to the amount of tax-efficient pension contributions you can make.
Sometimes known as the “pension dipper tax trap”, the Money Purchase Annual Allowance (MPAA) is triggered when you start to flexibly draw income, reducing your pension Annual Allowance to just £4,000.
This means you won’t be able to continue building up a significant sum tax-efficiently in your pension fund for later life.
Taking your 25% tax-free cash lump sum from your pension typically doesn’t trigger the MPAA, so this is something to consider when deciding how to draw your retirement income.
Don’t forget your State Pension
As well as any pensions you have personally contributed to, you’ll normally also receive the State Pension at age 66 (rising to 67 between 2026 and 2028).
If you receive the full State Pension in the 2022/23 tax year (you must have 35 years of qualifying National Insurance contributions) you’ll receive £185.15 a week – around £9,627 a year.
You do potentially pay Income Tax on your State Pension. So, if you’re continuing to work in later life, think carefully about whether drawing your State Pension in addition to your other earnings could result in an additional tax bill.
One option is to delay taking your State Pension. For each year you defer, you’ll get an increase of around 5.8% in the amount of pension.
So, deferring could be a useful option if, for example, drawing the State Pension might push you into a higher Income Tax bracket.
Get in touch
If you’d like to find out if phased retirement would work for you, please get in touch.
We can use sophisticated cashflow modelling to establish whether you have “enough” to retire, and we can create a plan that enables you to draw your income tax-efficiently so you can maintain the lifestyle you want.
Contact us by email at email@example.com or call us on 01189 876655.