Updated 03 September 2020
Retirement age? What’s that? These days it’s not about a date but a timescale: you might gradually retire over five, ten or even fifteen years. We are now firmly in the era of phased retirement – and it’s largely thanks to pension freedom. Not only could it make your later years more stimulating, but it could also be a way to stretch your pension pot further.
‘I may be old, but I’m not yet expired,’ sang Eric Idle, in the theme song to One Foot In The Grave. Being put out to grass was never the easiest life change – one day you have a wage and a job title, and the next you’re simply ‘retired’. No wonder Victor Meldrew couldn’t believe it.
But all that is changing. Although phased retirement – gradually reducing your working hours over a period of years – has always been with us, the old-style pension regime made it impractical for most people. Those who wanted to reduce their hours struggled to live off a reduced income, so it was more common just to stop work on a given date and buy an annuity.
With pension freedom, you have full flexible access to your pension fund from the age of 55. This opens up many possibilities for easing into retirement, rather than coming to an abrupt halt. It also offers an interesting solution to one of pension freedom’s lurking flaws: the risk of running out of money.
Why does phased retirement work so much better now? Well, consider.
Your pension should last longer that way
Research by Barclays has suggested that those with modest retirement expectations would want to spend about £17,500 a year. Based on current annuity levels, this would require a pension pot of around £350,000 – far out of most people’s reach. You might achieve that level of income for a while with a drawdown scheme, but it would very quickly drain a typical pension pot. However, this becomes more realistic if you are earning for longer, rather than living off just your pension – as you could not only supplement your pension income with earnings, but even top up your investments.
Previously there was a standard investment strategy for pensions: move the funds into safer, low-yield investments in the run-up to retirement, in preparation to buy an annuity. This meant missing out on higher-yield investments for the last five years or so. Under pension freedom, you can leave more funds invested in high-yield stocks, even after you’ve retired. A phased retirement plan would divide your fund into many segments (e.g. a thousand), with some staying in long-term, high risk investments, some in medium-term investments, and some in safe, short-term investments. The whole fund can thus work much more effectively.
A good rule of thumb is that you should expect to live off 70 per cent of your usual income in retirement. This might sound easy, until you realise it means slashing your expenditure by a whopping 30 per cent (try it sometime). Doing this overnight can be extremely difficult – but it’s much easier if you can get in several years of practice, gradually reducing your spending until reaching that magic figure is no effort at all. On a personal level, you’ll also be able to adjust to working less and having more free time, developing new interests at your own pace – rather than glumly going out to buy some golf clubs.
How do you plan something you’ve never done before? No wonder retirement decisions are so tricky. By phasing your retirement, you can literally ‘try before you buy’ – see what kind of income you’re likely to need, try out drawdown and learn more about your other options. That way, when you go to see your financial adviser, you’ll be able to discuss your ongoing options from a position of experience.
Although you don’t have to buy an annuity straight away, you may decide in later life that it’s the best option for you. You may also get better rates if you buy an annuity when you’re older, and if you have any health problems by then, you may qualify for an enhanced annuity – which can be some consolation.
Sudden change is never easy at any age, and when you’re older it can be a real source of stress – even, paradoxically, retirement. Giving yourself time to get used to a slower pace of life, while still making valuable contributions at work, is better not just for your bank balance but for your mental and physical health. So you’ll probably find you’re going to be needing that extra money you’re making – as you could be living longer to spend it.
You can talk to an adviser free of charge about your retirement plans by booking a free pension check.