More retirees than ever are shunning the traditional ‘cliff-edge’ retirement. Instead, they’re choosing a phased approach that sees them cutting back working commitments gradually. Whilst appealing to many, there are some financial considerations to weigh up before you start making plans.

Figures show there are more people aged 50-and-over in work than ever before. In fact, 10.45 million are now working. Over the last year, the number of people in employment has risen by 354,000. 86% of this increase has been in the over 50s age group, making it by far the fastest-growing employee age group in the UK.

Whilst some of these over 50s have yet to retire, many will have embraced a phased retirement. According to Aegon research, half (49%) of UK workers over 50 and earning upwards of £20,000 a year would ideally like to transition into retirement. Traditional retirement is now favoured by less than a third (31%) of workers.

There are many reasons why a phased retirement may be appealing:

• It allows you to continue earning an income
• You can still pay into a Workplace Pension
• You can create the work-life balance you desire
• It offers the social benefits of work
• It can help keep your mind and body active

Keeping your finances in check when choosing phased retirement

Working in some form as you transition to retirement can boost your finances. However, there are other consequences to keep in mind that may affect your decision, especially if you’ll be drawing from your pension too. These include;

• The Money Purchase Annual Allowance (MPAA)

If you’re planning to continue contributing to your pension, this is a key implication.

Currently, you can pay up to £40,000 into a pension and receive tax relief. Your Annual Allowance will depend on your salary and may be lower than this. However, once you start taking money from your pension, the amount you can save whilst benefitting from tax relief may fall.

The MPAA is just £4,000 a year. This may significantly reduce the amount you can save tax efficiently. If you’re not aware of the MPAA it could lead to an unexpected bill. If you had planned to contribute more than the MPAA, it could affect your overall retirement plans too.

The MPAA won’t normally be triggered if:

• You access only your tax-free lump sum, usually 25%
• Purchase an Annuity
• Move your pension into a Flexi-Access Drawdown scheme but don’t withdraw an income
• The pension is valued at less than £10,000

The MPAA rules can be complex. If you’re unsure if your plans may trigger the MPAA, please get in touch.

• Income Tax

Remember income from both employment and pensions may be liable for Income Tax. If your combined income exceeds the £12,500 Personal Allowance, Income Tax will need to be paid.

It’s particularly important to manage flexible withdrawals from a pension. Crossing the threshold into another tax bracket could mean you end up paying more tax than expected. Keeping an eye on withdrawals, and how they add up over the tax year, is, therefore, important.

• Means-tested benefits

If you expect to be eligible for means-tested benefits in retirement, keep in mind you may not receive these if you’re still working. As these benefits would take account of your income, you may not be able to claim them until you retire completely. In many cases, the extra income from employment will make up the shortfall. But, it’s important to check.

Making phased retirement work for you

Phased retirement can help you create the work-life balance that suits you. But you need to ensure it’s affordable and consider your finances.

Effective retirement planning will consider the three points illustrated above. It’ll also help you to understand if taking a phased approach is sustainable with your goals and lifestyle in mind. For example, would taking a phased retirement earlier than planned mean that you potentially run out of money during later retirement? Working with us can give you the confidence to proceed with the retirement you plan, whether it’s traditional or blends work and more leisure time. Contact us today to start planning your future.