Despite many people in their fifties and sixties wanting to reduce their working hours in the run up to retirement, the cost of living crisis is making this increasingly difficult.
One in 10 people who had begun to phase their retirement in the last few years are now having to increase their working hours again so that they can make ends meet as living costs soar, according to a survey of 4,000 people by insurer Legal & General.
As the way we live and work has evolved over recent decades, phased retirement has become increasingly popular, as it can gradually free up time to spend on hobbies, and with your family and friends, whilst continuing to work part-time.
The over-55s are phasing their retirement in different ways. Many people (37%) want to phase their retirement by reducing their working hours, so they can keep their job but reduce their stress levels. Around one in 10 (11%) will leave full-time employment to set up their own business to reduce their working hours. However, most people said they are making the decision because they simply cannot afford to retire fully (44%).
Two fifths (40%) of people who anticipated gradually moving into retirement in the next five years now worry living costs might mean this plan is not possible.
If you’re concerned about rising living costs, our articles 23 frugal living tips and Seven ways to save on your household bills may help you find ways to reduce your outgoings.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Why is phased retirement increasingly popular?
Millions of over-55s are planning to phase their retirement, by reducing their working hours and responsibilities before stopping work for good.
Around half (48%) of people aged over 55 will phase their retirement by reducing their working hours, the Legal & General research shows, with one in seven (14%) planning to start the process in the next year. Read more about your options if you’re planning to phase your retirement in our article How can I phase my retirement?
Lorna Shah, managing director of retail retirement at Legal & General Retail, said: “The number of pre-retirees considering a gradual or phased move into full retirement shows how much the perception of later life has changed in recent years. However people choose to approach retirement, it’s important they see it as something that should be actively managed, and not something they already feel they are ‘in’ or have ‘done’.”
More than half (54%) of those surveyed who are already taking a phased approach to retirement are working around 15 hours less every month, and earning an average of £9,150 less a year. As a result, 38% of those surveyed will have to adjust their lifestyle, and some (17%) expect to struggle with the rising cost of living.
One of the reasons phased retirement has become so popular in recent years is the introduction of pension freedoms in April 2015, which enable people to do as they wish with their defined contribution pensions from the age of 55 (rising to 57 in 2028). You can take up to 25% of your pension as tax-free cash, with several options over how to draw the rest. Phased retirement could involve drawing some income from your pension savings to boost cash flow, until you have enough saved, or you’re ready to retire completely. Read more in our article Your pension options at retirement.
You could use some of your pension to buy an annuity, or guaranteed income, to plug an income gap resulting from phased retirement. For example, the average income produced by an average £73,00 pension pot from a fixed-term annuity bought at age 55 is £9,000 per year. A fixed-term annuity lets you use your pension pot to buy a guaranteed income, but for a specific period of time, with a lump sum at the end, until another source of pension income kicks in. Find out more about annuities in our article Annuities explained.
Shah said: “For those wanting to keep their options open, while also looking for ways to supplement their income, flexible products such as fixed term annuities can play an important role. They provide a guaranteed income for a set time – in some cases as little as three years, helping to bridge any potential gap in salary.”
However, using your pension to boost your income is not without risk, as we explain in our article Should I use my pension to boost my income? Or, you may have other income sources you can tap into as you move towards retirement, such as money in individual savings accounts (ISAs) or from an investment property, for example. Find out more in our guide Is it better to save into an ISA or a pension?
Of course, many people have no option but to work for longer, as they may need to build up a bigger pension pot before they can afford to retire, given that the State Pension doesn’t typically provide enough on its own for a comfortable retirement. Read more in our articles Can I afford to retire? and How much should I save for retirement?
Getting advice or guidance on your pension
If you don’t need tailored financial advice, the Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, provides people aged 50 and above with free guidance on their pension choices at retirement. You can give them a call on 0800 138 3944 to book a free appointment, or you can book one via their website.
If you are looking to speak to a qualified financial advisor, however, and want specific recommendations based on your individual circumstances, you can find one on VouchedFor* or Unbiased.co.uk*, or for more information, check out our guide on How to find the right financial advisor for you.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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