Why phased retirement might become the preferred choice for more people

If you are approaching your retirement, you might be wondering what life could look like for you as a retired person.

While in years gone by, retirement was a very clear-cut stage of life (you typically finished work on a Friday and woke up on Monday morning as a retired person), in recent years this has begun to change somewhat.

Research by abrdn shows that 66% of people due to retire in 2022 are planning to continue working in some capacity, making phased retirement a much more popular choice than a traditional “cliff-edge” retirement.

So why would you choose to phase into retirement, and what could this look like for you?

Phased retirement allows the continued growth of your pension pot

One of the top reasons for choosing a phased retirement is financial. During the cost of living crisis, many households are looking for more ways to cover their bills and other outgoings. Continuing to earn money from a job or self-employment is one way of doing this.

There are, however, further financial benefits to a continued monthly income beyond paying the bills.

By working for longer, you will be able to continue making contributions to your pension pot. This not only allows you to save more for your future, but also means you can potentially benefit from employer contributions and tax relief.

If you choose to contribute to your workplace pension, some employers will also match your contributions up to a certain point. This is additional free money being added to your pension pot.

You may also receive tax relief on any payments you make into your pension up to your Annual Allowance of £40,000 a year or the total amount of your salary, whichever is lower. This means that more of your money will be invested into your pension rather than going to HMRC.

Alongside these contributions and tax relief, continued employment gives your pension pot more opportunity to generate returns, potentially growing your wealth even further until you decide to draw an income from it.

However, it is important to be aware of the Money Purchase Annual Allowance (MPAA). This means that once you start flexibly withdrawing an income from your pension pot, the amount that you can pay into it while still receiving tax relief may reduce.

A financial planner can help you to keep on top of this to ensure you do not overpay on your taxes and to make the most of the income you are earning.

Continuing to work maintains good physical and mental health

The benefits of phased retirement are not purely financial. Many people who have continued to work in some capacity into their retirement have found that there are also many physical and mental health benefits as well.

As Forbes reports, continuing to engage in paid or voluntary work into your late 60s can have far-reaching cognitive benefits that last well into your 70s.

Taking part in meaningful, challenging activities that allow you to keep learning means that you could protect yourself from developing diseases such as Alzheimer’s disease for much longer than if you stopped taking part in these sorts of activities in your early 60s.

Another benefit of phased retirement is its impact on loneliness and isolation. BMC has found that 50% of adults over 60 are at risk of social isolation, and one-third experience loneliness in later life. Meanwhile, according to the National Institute of Aging, loneliness can be linked to a higher risk of physical illnesses, including high blood pressure, obesity, and a weakened immune system.

However, working as part of a team means you can continue to have a healthy level of social interaction on a daily or weekly basis, taking good care of your physical and mental health as well as your financial wellbeing.

Different ways of phasing into retirement

There is no one way of easing into your retirement, instead you can decide what would be best for your individual needs.

You could:

  • Reduce your hours to part-time work at your existing job
  • Seek a new job with part-time hours
  • Job share with a colleague
  • Become a consultant for your industry
  • Start your own business.

Your retirement can be whatever you wish to make of it. Whether you decide to ease in slowly with a job share or part-time role, or if you would like to make the leap into consultancy or entrepreneurship, you could reap significant rewards in all areas of your life.

If you would like help planning your retirement and ensuring you get the most from your pension contributions and tax relief, we can help. Email enquiries@bowmorefp.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.

Workplace pensions are regulated by The Pension Regulator.

Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.

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