One step at a time

Posted on: 24-05-2016

The 2015 pension freedoms are encouraging more people to make a smoother transition into retirement.

Everything changes when you enter retirement. And if, like most people, you’ve spent the last 30-40 years working full time, it can come as quite a shock. Having a job is about more than receiving a wage. There’s also a sense of fulfilment gained from making a positive difference to the organisation you are a part of. Trading all of that for retirement, where suddenly there are no commitments and all the free time in the world, can be difficult.

There may be other reasons why taking the leap is tricky. You might not be able to afford to fully retire. Or your health might have suffered in some way so that you can’t manage to work as many hours, but don’t want to give it up completely.

This is why an increasing number of people have adopted a phased approach to retirement. Rather than stopping working
completely, they start to reduce their working hours. It means gaining more free time and, with it, the chance to dip your toe into the water of what retirement life is all about – whilst still retaining many of the positive aspects you associate with your job.

By not slowing down quite so suddenly, you can also stay more mentally and physically alert – which could make a real
difference to your long-term wellbeing.

With the pension freedoms, you can choose when you want to start accessing your pension* – and how you want to use it. This could mean keeping it invested via a drawdown option, and choosing to take a regular income or make withdrawals when you need it. In the meantime, your pension has the potential to continue growing in value. The trade-off is that your money would continue to be exposed to a level of risk. Another option might be to use some of the pot to arrange a fixed term annuity, which would pay you a set income for a specified period of time.

Accessing pension benefits early may impact on levels of retirement income and is not suitable for everyone. You should seek advice to understand your options at retirement. If required, you would be able to continue saving into the pension through your employee wage. Compared to being fully retired, you wouldn’t be as reliant on your pension and therefore be taking lower amounts from the pot – this means your savings may last you longer.

If you were to take this route of using your pension before you fully retire, it’s important to be aware of the withdrawal tax implications – which, coupled with your employee wage, could see you pay income tax at a higher rate. Equally, withdrawing too much too soon could significantly reduce the value of your pension pot, causing issues later in life.

The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future. *Pensions cannot be accessed before the age of 55 unless someone has retired earlier on the grounds of ill health or they have a low protected pension age.

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