For many years, the traditional “cliff-edge” style of retirement was the norm. You left work on Friday and woke up the following Monday as a “retired” person, able to spend your time however you wished.
While the traditional approach certainly has its advantages, in the past few years more and more people are choosing to take a more flexible retirement. In fact, according to data from Professional Adviser, two-thirds of people set to retire in 2022 plan to keep working in some capacity.
Read on to find out some of the advantages of “flexi-retirement” and whether it might be right for you.
Flexi-retirement lets you ease your way into retirement
Since 2015, Pension Freedoms legislation has given Brits more flexibility than ever before as to how they access their pension wealth. From the age of 55 (57 from 2028), you can draw an income while continuing to work in some capacity.
Flexi-retirement allows you to slowly reduce your work hours and ease yourself into your retirement. This might involve a job-sharing role, working part-time or even staying on as a consultant or setting up your own business.
Because IT skills are in demand, there are ample opportunities for professionals to find highly paid part-time work. Even just spending a few days of your week working can potentially be very lucrative.
Taking a flexible approach can give you a higher income when you draw your pension
One of the biggest advantages of continuing to work is that you will be able to keep building your pension wealth and, should you remain an employee, you could benefit from tax relief and employer contributions for a longer period.
It may also mean that you can draw income from your existing pensions much more slowly. This can help you to rest easy knowing that you will have enough to support you throughout your retirement.
When you decide you are ready to retire fully, you are likely to have a greater amount of wealth built up that will not have to support you for as long. This can give you a higher income and make it more likely that you can realise your retirement dreams.
Allow your pension the potential to enjoy growth for longer
Another benefit of flexi-retirement is that since you leave your pension wealth untouched for a greater amount of time, the funds could benefit from further compound growth. Ultimately, this can mean your funds are much larger than they would otherwise have been.
As you approach your retirement, pension providers usually change the balance of investments within your portfolio. Essentially, this helps to protect it against any unexpected market falls that could reduce the value of your assets and so affect your plans.
Of course, one of the consequences of moving from higher-risk investments to safer ones is that it can limit your possible returns. As you will know, there is generally a positive correlation between how much risk an investment poses and how high the returns it may offer are.
If you opt for a flexible retirement, since you would not need to access your pension as urgently, you could see more growth as you could leave your funds invested for longer.
Working flexibly can help you stay close to friends and colleagues
While taking a flexible approach to retirement can benefit you financially, there are social benefits, too.
Over the course of your career, you will have made many friends at your workplace but when you retire you may not be able to see them as often as you once did.
Working part-time or in a consultancy role can help you to keep in touch with these colleagues. By seeing them on a semi-regular basis, you can maintain your social circle even after you have retired.
While it may not be widely talked about, loneliness can be a real problem in retirement. According to a recent study by Age UK, around 1.4 million older people in the UK struggle with feeling lonely.
If you want to enjoy your retirement to the fullest, having these opportunities to see your old friends and colleagues can be invaluable. This is why flexi-retirement can be so useful, as it not only boosts your pension wealth but your mental health too.
Be careful to avoid potential tax pitfalls of flexi-retirement
While flexi-retirement has many advantages, it is important to be aware that there are potential tax considerations to bear in mind.
One of the most significant is the Money Purchase Annual Allowance (MPAA).
When you pay into your pension, you can benefit from tax relief, with the amount you receive equivalent to the rate of tax you pay. For example, if you paid the additional rate of tax, you would benefit from 45% relief when you made a contribution.
Due to this valuable benefit, there is a limit on how much you can pay into your pension each year while still receiving relief. This is known as your “Annual Allowance”, which, in 2022/23, is £40,000 or 100% of your annual earnings, whichever is lower.
However, once you begin to draw a flexible income from your defined contribution (DC) pension, the MPAA is triggered and your Annual Allowance is reduced to just £4,000.
If you are unaware of this, you could find yourself facing an unexpected bill and lose the chance of saving effectively.
We can help you make the most of a flexible retirement
If you are interested in a flexible retirement, seeking professional advice can help you to avoid any unexpected issues and build pension wealth in the most effective way.
When you work with a planner, you can rest assured that you are on track to enjoy the retirement you want. Email email@example.com or call us on 01275 462 469.
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.
The value of your investments can go down as well as up, so you could get back less than you invested.
Bowmore Financial Planning Ltd is authorised and regulated by the FCA.