Tips to help you work less and live more
People no longer suddenly retire in one go. Thousands choose to cut their hours and gradually phase out working life. To help, we offer 5 semi-retirement tips in our downloadable factsheet.
TIP 1 Dip into your pension while working
Reducing your hours, changing jobs, studying or starting a business could mean you end up earning less. Luckily, from 55 (rising to 57 in 2028) your pension can be used to make up for any shortfalls.
When you first access your pension you can normally take up to 25% of your hard-earned savings tax free, which you could use to help supplement a drop in income.
If your tax-free cash won’t be enough, or you have other plans for it (like paying off your mortgage), you can receive a taxable income from your pension.
For anyone who’s comfortable with the risks involved in keeping their pension invested, drawdown can really help complement a gradual retirement. You choose how much income to take and if your circumstances change you can adjust the amount. You also have the freedom to choose your own investments, and if they perform well you could receive a growing income. Although investments can fall as well as rise in value, so you could get back less than you invest. You should bear in mind the more income you take early on, the less you’ll have later in retirement.
Alternatively, if you don’t want to worry about the ups and downs of the stock market in retirement, an annuity will provide you with a guaranteed income for life. But for most this might not make sense until after they finished work completely. More on this in tip 5.
TIP 2 You can take an income from your pension while paying into one
If you’ve got a workplace pension you can still benefit from tax efficient pension contributions from your employer. Alternatively you can contribute to a private pension and benefit from tax relief.
However, if you take a taxable income from your pension through drawdown or as an Uncrystallised Funds Pension Lump Sum (UFPLS) you’ll trigger something known as the Money Purchase Annual Allowance (MPAA). This means contributions to all your Money Purchase Pensions are limited to £4,000 each tax year.
By just taking your tax-free cash you won’t trigger the MPAA, but you’ll need to be aware of tax-free cash recycling. These rules apply when paying into a pension after you’ve taken your tax-free cash. Tax rules can change and benefits will depend on your circumstances.
TIP 3 Reduce your hours without changing jobs
Working fewer hours a week and gradually moving into retirement could be easier than you think.
You can talk to your employer about the possibility of reducing your hours. And you have the right to request flexible working. They have the right to refuse, but they must have a valid business reason for doing so. The Citizens Advice Bureau provides online guidance for enquiring about flexible working.
TIP 4 Think about putting off the State Pension
If you’re still working when you reach State Pension age, you might not need it straight away. You can defer payments if you think you won’t need them. For every nine weeks you defer, the Government will increase your payments by 1%. This gives you around 5.8% extra a year.
So if you’re due to get £168.60 a week when you reach state pension age but choose to defer for 12 months your weekly payments will increase to around £178.38. Find out more about the State Pension.
You can put off a defined benefit (e.g. final salary) pension too. Most of these schemes will increase the amount you receive each year if you do defer. Your scheme provider can tell you how much more this will be.
If you delay taking your State Pension or final salary pension you will miss out on income in the meantime. You should weigh up the potential cost or benefit before deciding whether or not to defer.
TIP 5 Choose the right time to buy an annuity
If you’re happy to keep your pension invested, you might not benefit from buying an annuity straight away, particularly if you plan to semi-retire.
Throughout retirement your income needs will probably change. In the early years it's possible you’ll want a more flexible income, and in the later years you might be after more security.
A secure income is still really important in retirement. A good time to look at buying an annuity is when you give up work altogether. You’ll no longer have an income stream from your earnings to cover your essential bills, and an annuity can help cover these.
Rates also tend to be higher for older people, especially those with medical conditions. With every year you get older and potentially develop health conditions you could get a higher annuity income. Although annuity rates change all the time, so there’s no guarantee the rate you get in the future will be higher than the rate you could get now.
Your annuity rate also depends on the options you choose, so it’s important to choose your options carefully as once set up you can’t normally change your mind.
Guide to semi-retirement
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