Brits planning for retirement are shunning a traditional ‘cliff-edge’ approach. Instead, as life expectancy increases, we’re more likely to view retirement as a transition. While it presents an opportunity to pay into a pension for longer, it comes with challenges too. Being prepared for retirement is crucial, whether you hope to transition into a new lifestyle or not.

Keeping active is at the heart of the flexible retirement trend

Research conducted by Aegon questioned workers from 15 countries about their retirement plans. It found that UK workers are the least likely to want to stop work immediately once they reach retirement age. This option was attractive to just three in ten Brits. In contrast, 57% of workers in Spain, 49% in France and 40% in Germany are planning a traditional retirement.

So, what’s driving the trend for flexible retirement in the UK?

Far from being about money, the key driver is lifestyle. As life expectancy has increased, retirement is being viewed as transitional and many workers want to retain aspects of their current lifestyle. Almost six in ten (59%) said the biggest reason for choosing a flexible retirement is to keep active, both physically and mentally.

Remaining in the workplace in some way may also have a positive impact on other lifestyle factors,  such as maintaining a social circle and providing purpose. These can also have a positive impact on wellbeing.

If you’re nearing retirement, a transition phase may be appealing to you. But what are your options?

Flexible retirement allows you to take control, so thinking about your goals and priorities is important. For some, simply cutting down hours will allow them to strike a work-life balance that’s right for them.  Others may want to move to a less demanding role, work from home or even become self-employed.

Having a transitional retirement period can give you more freedom than you may have had at other points in your career. Use the opportunity to create a lifestyle that matches your aspirations.

Your pension when choosing a flexible retirement

A transitional retirement can make deciding how to create an income from pension a more complicated process. Your income needs are likely to change during this period and once you fully retire. It’s important you consider this. Decisions you make in early retirement could affect you for the rest of your life.

1. Taking a tax-free lump sum

From the age of 55 (rising to 57 in 2028) you can access your pension, including taking a 25% tax-free lump sum. It can be tempting to take this as soon as it’s available. However, if you don’t need this money or do not have plans to use it, leaving it invested through your pension can make financial sense. You should also consider the long-term impact of taking a large lump sum from your pension early on.

2. Taking an income from your pension

Depending on your salary and lifestyle, you may want to access your pension to supplement your income while working. There are several things you need to consider here, from tax implications to what a sustainable income is.

Taking too much too soon from your pension can mean you struggle financially in the future. As a result, assessing how income needs will change and how your pension will support this is essential. If you want to transition into retirement, a financial plan that considers this can help you balance short and long-term income.

3. Continuing to pay into a pension

If you’re still earning an income, you may decide to continue paying into a pension. This can improve your income later in life. Thanks to employer contributions and tax relief, a pension is often the most appropriate place to save for retirement.

Keep in mind if you have withdrawn an income from your pension, the amount you can contribute tax-efficiently may be lower due to the Money Purchase Annual Allowance. Exceeding this allowance can result in tax charges, please get in touch if you have any questions.

Remember, things don’t always go to plan

A flexible retirement can be a wonderful opportunity, yet the research also highlighted that just 30% of UK workers have a backup plan.

You may plan to work beyond retirement age, but what would happen if you were unable to continue working? Changes in the job market, or to your health, could mean you end up retiring much sooner than anticipated. If you’re relying on your salary, this could affect your long-term financial security.

Even the best-laid plans go off track due to factors outside of your control. Some 47% of UK retirees say they retired sooner than they had planned.

If your working life is cut short, having a backup plan can help ensure you’re financially secure. Please contact us to discuss your retirement plans. We’ll work with you to create a blueprint that places your aspirations at the centre, as well as taking steps to protect your lifestyle and goals if you’re forced to give up worker sooner than expected.

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 tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.