Updated 03 December 2020
Ah, Star Trek. The crew of the Enterprise challenged our ideas about retirement long before pension freedom was ever thought of. To mark the launch of our new checklist, ‘Your Retirement Countdown’, we’re boldly going to explore some post-work options where you may not have gone before.
Nothing to do with phasers, but still a stunningly good idea. The practice of withdrawing gradually from working life (rather than stopping suddenly) is not of course new – but the flexibility of pension freedom has made it a more viable option for many people. Now it is possible to scale down your working hours without making such a dent in your income, when you can supplement your earnings with (for example) flexible drawdown from your pension pot. Similarly, continuing to work means your pension pot could last longer – and you may even be able to make further contributions to it (although the amount of tax relief you receive will fall if you have begun to draw on your pension).
Traditionally a pension has been purely a source of income for retirement – in the past it couldn’t really be anything else. But now it has additional perks. Unlike ordinary savings, pension pots can be passed on to beneficiaries free of inheritance tax (IHT). Therefore, it could make sense to live off savings and other income as long as you can before breaking into your pension pot – because its tax-protected status is something you’ll want to Klingon – sorry, cling on to as long as possible.
Expanding on point 2 above, if you start to see your pension as a kind of IHT escape capsule, then little prevents you from ‘beaming’ some of your savings into your pension to preserve more of them for your beneficiaries. Of course, you will probably still need at least some of this money to live on – but it’s still worth considering, because of the additional money the savings will attract in the form of tax relief.
You can increase the value of your state pension if you delay claiming it by five weeks or more. It will increase by 1 per cent for every five weeks you defer it, which works out as 10.4 per cent for every full year. So if you start taking a full state pension just one year late, you would receive an extra £627 (10.4 per cent of £6,029.40). Or you can choose a one-off lump sum payment to make up for the time you’ve deferred, to include interest of 2 per cent above the Bank of England base rate. It’s not out of this world, but it’s good enough.
Or should we say an enterprise? Drawing a pension doesn’t ban you from doing constructive and profitable things. Many of us aren’t cut out for endless rounds of golf. After four decades of work you’ll probably have a lot of valuable skills and experience – some retired people become part-time consultants in their area of expertise, or public speakers, freelance writers, artists, B&B owners… the list goes on. Maybe you have a skill or passion you’ve never seen as a potential source of income, because that dream of selling pottery or home-made sweets is just too risky. But now, in retirement, you might have nothing to lose and it’s worth giving it a shot. Some people only come into full bloom after retirement age – just look at William Shatner.
Prepare to explore your own final frontier with ‘Your Retirement Countdown’, our latest checklist to guide you up to the point of retirement and beyond.