For previous generations, retirement was – more often than not – a single event. It’s likely your parents left work for good on a Friday, and then started their retirement on the following Monday.
One reason for that was that UK pension arrangements tended to be inflexible. Your retirement age from your company pension scheme was usually the same date as when you would start to receive your State Pension.
There were also restrictions on how you could draw your retirement income. This usually boiled down to a choice between buying an annuity – which gave you a guaranteed income for the rest of your life – or taking income drawdown that, while more flexible, still meant strict parameters in terms of the income and lump sum you could take.
The introduction of Pension Freedoms legislation in 2015 has added valuable flexibility to your retirement planning. Read on to find out more about why this means it’s now much easier to plan for the retirement you want, and why “phasing” your retirement could be the best option for you.
1. Phasing retirement will depend on your personal circumstances
The idea of phasing your retirement is becoming increasingly popular.
According to a report in the Independent, two-thirds of people retiring this year won’t give up work completely. This is almost double the equivalent figure from 2020.
Part of the reason for this may be the recent cost of living challenges that might have prompted many people to delay full retirement until things are back on a more even keel.
The Covid-19 pandemic may have been one of those “once in a generation” cataclysmic events that can prompt many people to reconsider long-held plans – such as retirement.
Whatever the reason, if you are thinking of a phased retirement, it’s important to plan ahead and be sure you’re aware of the implications.
2. A phased retirement can put less strain on your pension fund
Phasing your retirement effectively means reducing your working hours, creating time for other activities and allowing you to start ticking off some of the items on your bucket list.
So, one key advantage of a phased retirement is that you will still have an earned income, alongside the retirement income you draw from your pension savings.
This means that you’re not drawing as much from your fund as you would have been had you retired fully. It also leaves more of your fund in situ and subject to potential investment growth.
Furthermore, you also have an earned income from which you can make further contributions to your pension fund.
It may seem counterintuitive paying into a pension while you are taking retirement income, but tax relief means making pension contributions can be a highly tax-efficient way to save money.
One thing to bear in mind, however, is that if you start flexibly drawing income from your pension fund, the maximum you’ll receive tax relief will likely reduce to £4,000 gross a year.
3. Don’t forget the mental aspect of stopping work
It’s worth remembering that you may well rely more than you realise on the social interaction and mental challenge you get from working.
So, an important benefit of phasing your retirement is that it can help keep your mind active and maintain the social contact you get from a busy work environment.
By reducing your working hours, you’ll still get the benefit of a social network, and the stimulation of the work routine, with time to recharge your batteries and develop a separate lifestyle outside work.
4. There are different options for continuing to work
Once you’ve made the decision to continue working, there may well be various options available to you.
For example, the most straightforward option is to continue in your current role but on reduced hours – maybe a job-share or a different role in the same company.
Alternatively, you may not want to stay with the same employer, but do want to remain in the same sector, and give a new employer the benefit of your valuable experience.
Another possibility is to work on a consultancy basis for a different company – maybe for a certain number of days each month – or on specific projects.
Finally, if you’re self-employed, how you wind down is up to you and will be dependent on what you’re comfortable with.
5. Owning a business makes retirement a key decision
Owning a business adds a different dimension to the phased retirement choice.
You may well have thought about succession planning and might find that continuing to work on a reduced-hours basis will add valuable flexibility when it comes to planning the future of your business.
If you’ve worked hard to build it up, you’ll want to secure its future – whether that’s passing it to family members or new ownership.
The chance to stay in an advisory role for a transitional period could make a key difference and ensure a successful “passing of the torch”.
6. Knowing when to eventually stop working
There’s clearly no hard-and-fast rule as to when you should stop working completely.
However, you should always be cognisant of your health. You may well find that your body will tell you when it’s time to retire permanently.
You should also take the wishes of other family members into account – as well as their plans for the future. Your spouse or partner may well have their own ideas about retirement, for example, and so you could align with them.
One final point to consider is that you may want to consider a “trial retirement” if circumstances allow. This could leave the option open for you to return to some style of work – even voluntarily – if you find that a quiet retirement isn’t for you.
7. Phased retirement and your super fund
If you have an accrued super fund in Australia, you’ll clearly want to include that in your retirement plans.
As you’re probably aware, you can’t transfer your super to a UK-based pension. Even so, it is possible to take steps to ensure you can draw from your fund as tax-efficiently as possible while living in the UK, and to maintain a level of flexibility in terms of when you can do this, subject to the parameters of the fund in question.
We would strongly recommend you get expert advice in this regard.
Get in touch
If you want to know more about whether a phased retirement could be right for you and how to access your super fund if you’re living in the UK, please get in touch with us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.