4th May 2016 at 3:11pm
A recent survey from Prudential has revealed some interesting insight on how people view their transition into retirement.
Its class of 2016 study showed it was now becoming the norm for people to delay their retirement plans in order to change jobs or go part-time instead of giving up altogether. With more than half of people surveyed saying they are staying in work.
A matter of priorities
Money does play its part in the decision making, with one in four saying they can’t afford to stop just yet, but for many it’s the fact they still feel fit and healthy and just want to continue working. Among the non-financial reasons for continuing to work, 51 per cent said they would prefer to work to keep their mind and body active, 34 per cent said they didn’t feel ready to retire, 41 per cent said they enjoyed working too much to give up, and 16 per cent said they never wanted to retire at all!
And with life expectancy on the up people are recognising they may be spending 20 years or more in retirement, which has also helped fuel this trend for making the transition into retirement a gradual process rather than a one-off event.
Wealth and happiness
For those where retirement is purely a financial calculation and are worried they might not have enough in their pot to cover it, working full-time for a few more years could make a difference to their long-term plan if they continue to save. However, adapting to a phased retirement approach might also tick the box from both a financial and emotional perspective.
Striking the balance
Retirement needn’t be an all-or-nothing decision – it’s not a case of you’re either still working full-time or you’re completely retired. You’ve a lot more choice now than previous generations enjoyed. If your primary goals for retirement are happiness and fulfilment. You don’t necessarily have to stop working to achieve them. You might enjoy the retired life more if you reduce your hours.
Clocking in at a reduced schedule allows freedom to focus on the other parts of life, such as family, travel and volunteering, while still earning a salary and employer benefits to keep your financial safety net in place.
Many employers will let you switch to a phased retirement track, working part-time and gradually cutting back those hours until you’re ready to retire completely. If this seems like something you might want to consider, you should ask your employer about the possibility. You might be surprised by how accommodating they are.
Tapping your pension potential
And phasing in your retirement and taking that time out doesn’t always need to mean a drop in income. With the introduction of greater flexibility for pensions in April 2015 it’s made it possible for people over the age of 55 to do a wider variety of things with their pension money. If thinking of reducing your hours you could subsidise any shortfall with your pension.
A tax-efficient way of doing this could be to draw your pension in stages, particularly if you choose an option known as income drawdown. This allows you to draw the money you need directly from your pension, and keep the remainder invested and under your control. You’ll be able to dip in and make as many withdrawals as you want, each time getting 25 per cent tax-free (assuming you’ve not already taken all your tax free cash) with the rest taxed as income. And providing you get your investment decisions right, whatever you haven’t spent could still be growing, but it’s always worth remembering there’s a chance it could drop too.
Meeting the challenge
One of the biggest challenges if you’re thinking of going down the income drawdown route will be making sure your money lasts over time; taking the income you need today as well as making your money last through your retirement. And, of course, with new rules reducing tax when inheriting a pension, reducing it to zero in some circumstances, you might want to make sure you have enough left to pass on to your loved ones too. For more information and some top tips, it’s worth having a look at our ‘Take control of your retirement income’ blog, where our Head of Investment Governance, Gareth Trainor, looks at some ways to balance these different goals.
Downshifting the daily grind
By reducing your hours, chances are you will make less money than you did before. On the other hand, you’ll now have more flexibility to focus on the other parts of your life, and there’s great value to this new mix of money and time. And, if you get the balance right by using your pension to supplement the shortfall, the financial transition might not be as difficult as you think.
The information in this blog or any response to comments should not be regarded as financial advice. A pension is an investment and its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in May 2016. Your personal circumstances also have an impact on tax treatment.