early retirement

The Beginners Guide to Flexible Retirement

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havenifa


Posted on: 29th August 2019

Everyone has different requirements and expectations for both work and retirement. However, this is why many are following a flexible retirement plan. If you are thinking about balancing work and retirement beyond your 60s, it’s worth learning about what’s available to you.

Strategies for a flexible retirement

The most popular strategy is to keep your current job for longer. Two-thirds of workers over the age of 50 are happy to keep their job until they retire. What’s more, one in five employers offers some sort of support for older employees. If you plan to work later on in life, it’s worth knowing what’s available.

Reducing your hours

Even if this is something your employer does not explicitly offer, it may be worth discussing whether you can reduce your hours. You could ask to work more flexibly or from home but be aware that your employer has the right to refuse if they have a valid reason.

Deferring the State Pension

If you are still in work when you reach the state pension age and you don’t need it immediately, you can defer it. As long as you defer for a minimum of nine weeks, you will receive a higher state pension at a rate of 1 per cent for every nine weeks. There is a trade-off between the fact that you are receiving a higher income and the fact that you have to wait longer for it.

Paying into a pension while working

Personal pensions and defined pension contributions allow you to continue contributing past the age of 65. Defined benefit schemes come with numerous rules, so it’s important to study up on the specifics of the scheme. There may be an age where benefits stop accruing or a maximum accrual of two-thirds of your salary. Once you hit either of the two, you won’t save any more into your pension.

If you are still able to accrue benefits, but your role changes, you must have confidence in your pension’s impact. In certain circumstances where you reduce your hours, the scheme will proportion your salary but may reduce the accrual rate as a result of the shorter working hours.

In other scenarios, moving to part-time work, especially when your job role is changing, may mean you cannot continue to accrue benefits in this particular scheme.

Deferring a pension while working

You are not required to take an income from a personal pension. This means you can leave it invested and continue contributing. For workplace pension schemes you will likely be able to continue paying into the pension which can grow.

If this leads to you delaying an annuity, simply because you don’t need a pension income, you may receive other benefits. There are no guarantees of a rise in the annuity, but you will be offered a higher rate as you get older. You should also declare health conditions or illnesses you are currently facing as you may be entitled to an enhanced annuity. Similarly, there are benefits to deferring your defined benefit pension.

If you take it with your salary, there’s a risk of being pushed into a higher tax bracket. But, if you put off drawing the pension, the income payable will likely rise in value each year. It’s worth checking the terms of your scheme, but it’s normal to see rises of up to 8 per cent each year. This is why you may want to see if you can leave a defined benefit pension untouched.

Drawing your pension alongside work

If you choose to work fewer hours or find a less stressful position, choosing to draw a pension income alongside it might make perfect sense. You can receive your State Pension as soon as you reach the correct age – you needn’t be retired.

Drawing from a defined contribution pension while working

While continuing to work, you can still draw from and contribute to a defined contribution scheme. However, please note that this will usually trigger the Money Purchase Allowance. In other words, if you continue contributing to a workplace pension while withdrawing from a defined contribution pension, you cannot pay in as much.

The withdrawing options are limited with defined contribution schemes. You can use some to purchase an annuity that covers the income difference, or you can dip into your pension savings whenever you like from the age of 55. This can be done either through drawdown or by taking a UFPLS (Uncrystallised Fund Pension Lump Sum). An advantage of a drawdown is that the money you initially take is considered to be your 25 per cent tax-free lump sum. By doing this, the rest will remain invested without triggering your Money Purchase Annual Allowance.

Taking a defined benefit pension while working

To take benefits from a defined benefit pension, you will usually need to stop paying into it. However, you may still be able to take income from your workplace scheme and continue paying into some form of workplace pension. In some cases, your employer will allow you to stop paying into the scheme and begin to accrue benefits in a separate pension agreement. In other cases, where you have an additional voluntary contribution (AVC) alongside the defined benefit pension, you can take a lump sum from your AVC without your defined benefit scheme being affected.

Choosing which pension to draw from

If you have multiple pensions that have build up over your career, a more gradual retirement will allow you to pick which pensions you defer, where you contribute and where you take an income from. This decision will be based on what you have and your scheme rules.

In the event that you can continue to accrue benefits in a generous defined benefit scheme and draw from a separate defined benefit scheme, you may want to consider this option. Even if you cannot continue to accrue benefits in the defined benefit scheme, check the annual increase you will receive from deferring. From there, assess whether this offers more potential than growth on any defined contribution scheme.

If you have several defined contribution schemes, check for any valuable guarantees before choosing where to draw from and where to pay into.

Doing what is right for you

If you feel like these options are overwhelming and you don’t know what to pick, don’t panic. Speaking with an independent financial adviser can help narrow down your options and decide which route will be best for your financial future – our Pensions Guide is a handy booklet to assist you in your decision. At Haven IFA, we aim to prepare our clients for a comfortable and enjoyable retirement. If you would like to learn more about our services, get in touch.