You’ve likely been saving for and looking forward to your retirement for many years. Yet, as it approaches, you might feel you are not emotionally or financially ready to leave the world of work behind.
A study reported in Pensions Age found that almost half (47%) of those aged 18 to 24 intend to work part-time when they reach retirement age, compared to just 17% of current retirees who chose to wind down gradually.
The study also found that lowering your working hours (rather than fully retiring) can significantly boost your pension pot, potentially giving you a more comfortable retirement when you do choose to leave work.
Moreover, with people living longer than ever before, it is not uncommon to live two or three decades beyond your retirement date. While you may relish the prospect of so much free time, you may also struggle to find the same sense of purpose that your regular job provided.
Read on to find out what “phased retirement” is and whether it could be right for you.
Phased retirement provides flexibility in managing the transition from full-time work to retirement
Phased retirement encompasses a variety of arrangements that enable you to gradually reduce your workload as you approach or pass retirement age, allowing you to transition from full-time work into retirement slowly.
As life expectancy increases, such arrangements are becoming more common.
The current State Pension Age is 66, though it is set to rise to 67 by 2028. The normal minimum pension age (NMPA), which is the age at which most people can access their pension without incurring a tax charge, is 55, rising to 57 by 2028.
The latest life expectancy figures from the Office for National Statistics (ONS) reveal that men and women aged between 55 and 67 can expect to live until between 84 and 88 on average.
This means that if you choose to retire at the NMPA or the State Pension Age, you are likely to be in retirement for an average of around 30 years and 20 years respectively.
Many older workers value a phased retirement as it allows for a smooth transition out of work, rather than an abrupt end. It also allows them to continue saving for a pension that may need to last longer than they planned.
From your employer’s perspective, phased retirement means they get to retain an experienced employee. So, it could reduce their total business costs and facilitate the training of younger employees before you fully retire.
There are potential emotional and financial benefits to a phased retirement
After years of hard work and saving, you may be keen to retire as soon as possible. However, there are financial and emotional benefits to a phased retirement that are worth considering.
Financial benefits
Pensions Age reported that gradually reducing your days or hours after you reach retirement age could considerably boost your pension pot.
Working three days a week from the age of 66 to 70 could add £87,000 to your pension, and working just one day a week for a few years after retirement age could add as much as £71,000.
This is because you will most likely earn a higher salary toward the end of your career, and the additional contributions you make to your pension could significantly boost your savings.
Moreover, the time you stay in work reduces the number of years you will need to draw from your pension, meaning the savings you have will go further.
It’s important to note that if you do start accessing your pension while still working, you may trigger the Money Purchase Annual Allowance. This usually reduces your Annual Allowance for pension contributions from £60,000 to £10,000 (in the 2024/25 tax year).
Emotional benefits
There could also be emotional benefits to a phased retirement, and it may support your mental wellbeing through what many find to be a challenging period of transition.
When you leave work, you may realise that your job provided more than just a salary. It might’ve shaped your sense of purpose, routine, and even your identity. It may have also offered you a social life and the feeling of belonging to a team.
According to ONS figures, 46% of people aged 50 to 65 who left or lost their jobs during the pandemic due to their physical or mental health expressed a desire to return to work, either for social interaction or because they enjoyed the work itself. Additionally, 42% believed that returning to work would improve their mental wellbeing.
So, abruptly stopping work as you near or reach retirement age could have emotional consequences and negatively affect your mental health.
A phased retirement can help ease this transition by allowing you to gradually reduce your workload while still staying connected to the social and professional aspects of your job.
A financial planner can help you determine if a phased retirement is right for you
While the emotional considerations of choosing a phased retirement are largely personal decisions for you and your family, a financial planner can help assess how your wealth will support you during this transition.
They can use cashflow modelling to estimate what your finances will look like in the years to come. By analysing data such as your income, assets, and outgoings, and factoring in elements like your retirement age, inflation, life expectancy, and investment growth, a financial planner can help you understand what your future finances might look like.
They can then work with you to create a tailored strategy that considers your reduced income, ongoing contributions, and long-term retirement goals, ensuring you maintain financial stability throughout your phased retirement and beyond.
To speak to a financial planner, get in touch.
Email admin@stonegatewealth.co.uk or call us on 01785 876222.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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 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.
The Financial Conduct Authority does not regulate cashflow planning.
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