There are currently over 1.4 million people working beyond retirement age, according to the Office for National Statistics. The number of older people in work has almost doubled from 753,000 in 1993 and this figure looks set only to rise.
Some people keep working because they need the money, others because they enjoy their role and don’t want to stop abruptly. But no matter what the reason is for delaying retirement, there is no denying the ‘big bang’ model of working one day, retired the next looks set to become a thing of the past.
In fact, according to a study by advisers Hargreaves Lansdown, over a third of full-time workers plan to switch to part-time hours before retirement. “A phased transition to retirement is increasingly likely to become the norm,” says Tom McPhail, head of pensions research at Hargreaves Lansdown. “This does present more financial planning issues and it is critical to make sure that you take the time to plan ahead and identify in advance what your financial requirements are likely to be.”
Easing into retirement
If you decide that you would like to go on working for longer than the average retirement age, then you may want to consider options to support you if, for example, you can agree to work reduced hours and need to supplement your income from your pension pot.
Fortunately, the new pension freedom rules introduced in April 2015 mean that it is now much easier to withdraw lump sums from your pension pot as and when you need them – subject to income tax.
The idea of ‘Phased Retirement’ is a process of withdrawing money from your pension fund in stages, rather than securing your retirement income all at once. This method uses only a part of the accumulated pension fund each year, and in particular, uses the tax-free cash amounts for income purposes. This means that, particularly in the early years, it is possible to create a highly tax efficient income stream.
As you’re only withdrawing part of your pension fund, the rest of the fund can continue to be invested, generating returns over time.
Nick Hungerford of online investment managers Nutmeg says the traditional way of working one day and being retired the next has come to an end, and employers will have to adapt to cope with the phased retirement model, while the financial services industry will need to innovative to create suitable products for the changing needs of the next generation of retirees.
“Final salary pensions are a thing of the past; people are living longer and attitudes to working in later life have changed,” says Nick. “Pension freedoms have opened up phased retirement, allowing retirees to access their savings as they see fit, while continuing to work if they so wish - notwithstanding tax implications.”
The changing face of pension investments
What do you need to consider in order to keep your options open? What steps could you take to enable yourself to slowly ease into full-time retirement?
Patrick Connolly, a certified financial planner at Chase de Vere, a financial advisory company, says working beyond the age of 65 will become the norm for many people “either through choice if they’re still fit and healthy, or through necessity if they can’t afford to retire, especially as the state pension age increases”.
Working later into life will have a knock-on impact on the way pensions are invested. The general perception of pension investments is that people can afford to be aggressive and invest more in equities when they’re younger, then look to protect the value of their savings as they approach retirement by taking bigger holdings in cash and fixed interest assets, such as bonds.
But with increasingly flexible boundaries between ‘work’ and ‘retirement’, plus increasing longevity to consider, the case for moving wholesale out of equities into less volatile investments no longer makes as much sense as it once did.
At the moment, many pension schemes are not set up to take this new approach into account. You may need to speak to your scheme provider to see if its investment approach is suitable for your needs and potentially change investment approach if you feel your requirements are not met by your scheme. You may also wish to speak to a professional financial adviser to understand the options available to you.
Mark Butterworth, head of technical services at Skipton Financial Services Limited (SFS), explained, “The benefit of reviewing your pension arrangements now is that it will allow you to evaluate and take positive steps, which can make a big difference.
“You might need to make changes to the way you save and invest, but they don’t necessarily have to be big changes.”
Are you planning to take a phased retirement? How are you doing it? Let us know below or in the Forum
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.