How to blend your retirement

When the world shut down in 2020, no one knew the opportunities that this would create but in a very short space of time remote working became commonplace all around the world, spreading like the virus which bore its necessity. With the new Pension Freedom Rules being introduced in 2015 and the wider changes to the working landscape that have occurred in the years since then, the idea of retirement has shifted dramatically.  

Once upon a time, retirees will have hoped that their guaranteed income in the form of a State Pension and their Final Salary scheme from a previous employer or an annuity will have provided them with enough to sustain their desired lifestyle. As a result, most who reached age 60 hung up their boots altogether in what we call a ‘hard-stop’ retirement.  

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Today, retirement can take endless forms. You can now access your pension from age 55, increasing to 57 from April 2028 unless the plan has a protected pension age, and can choose to take part or all of the pot in cash lump sums, keep the pension pot invested while you draw an income from it, purchase an annuity, or combine all three options.  

Furthermore, you don’t have to touch the pension at all! You can leave the money invested and watch it grow further. The key theme here is choice, and this not only relates to the drawing down from your pensions, but also to the stepping down from work. The idea that you are either ‘in’ or ‘out’ of retirement is becoming a dated concept and the benefits of reducing your hours or remote working in the early stages of retirement are too clear to ignore.  

UK Government looks to encourage retirees back to work 

When Chancellor of the Exchequer, Jeremy Hunt, urged that millions of retirees should return to work in some capacity, many deemed it an unreasonable request. But would it help? Naturally, some form of employment income when you first retire through one or two days a week in work will reduce your dependency on your pension to fund your lifestyle. The less you draw upon it in the earlier years, the more you will have to last you throughout the rest of your life.  

To really demonstrate what blending your retirement could look like, consider the following simplified example: 

• Joe is aged 60 and has just ceased his full-time employment as a management consultant.  
• He has £20,000 saved in a Stocks and Shares ISA. 
• He has accumulated £300,000 in a Defined Contribution pension pot.  
• He will be in receipt of the full State Pension of £10,600 per annum when he turns 68. 
• His expenditure levels are set to £20,800 per annum which is the amount the Pensions and Lifetime Savings Association (PLSA) says is needed for a single person to have a “moderate” retirement.  

The following chart shows Joe’s financial future laid out in a timeline format.

In this scenario, Joe would experience a shortfall in terms of what he needs and what he has by age 86. If Joe were to work just two days a week for five years in a less intense role that pays him £14,000 per annum, his financial landscape would be affected as follows:

By blending his retirement, Joe has made his accumulated pension wealth last for a further ten years. 

Consider the way in which benefits are taken for your pension 

What must also be considered is the way in which benefits are taken from your pension. The option of a regular retirement income for life can still be achieved by purchasing an annuity. However, this may not be suitable for retirees who will be in receipt of guaranteed income through a Final Salary scheme or simply for those who enjoy taking on more investment risk.  

Additionally, for those who foresee themselves getting itchy feet in retirement and seeking some part time work, using your pension pot to purchase an annuity would not necessarily be appropriate. This is because you would be withdrawing your savings from a vehicle whereby, they can grow tax efficiently (free of income tax and Capital Gains Tax) in order to supplement your already sufficient income streams.  

The most flexible method of drawing upon your pension pot is through ‘Flexi-Access Drawdown’ – an option whereby you can take the tax-free element of your pension (usually 25% of the entire pot) and maintain the flexibility to take an income from the remaining funds or leave them invested. Joe, for example, could benefit from this option. In the second scenario, he does not need to draw upon some of his pension savings until he has reached age 90. It makes sense, therefore, that he leaves these funds invested to benefit from long-term growth in a tax efficient vehicle. 

There are certain tax legislations that need to be considered when drawing upon your pension pot. Firstly, once you access taxable income, you will trigger the Money Purchase Annual Allowance. This means that you can now only put £4,000 a year into your pension and still benefit from tax relief, rather than the usual £40,000 annual allowance. Furthermore, pensions are a tax-efficient way of passing on wealth to your loved ones as they are not subject to Inheritance Tax. If you don’t need to withdraw funds from your pension, it’s important to remember this.  

Clearly there is much to think about when it comes to designing your retirement and no two people’s situations are identical. The options available can be intimidating but given the correct thought and guidance, the increased flexibility will only act as a benefit. 

If you’d like to learn more about how we can help you plan your financial future, why not get in touch for your free initial consultation.

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Please note: The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The Financial Conduct Authority (FCA) do not regulate estate or cash flow planning, or tax advice.