Not so long ago, retirement followed a fairly similar path for most people. You gave up work on your retirement date and used your pension to purchase an annuity, providing you with a guaranteed income. But times have changed.
Today, you have more flexibility when it comes to your retirement. However, it brings more complexity too. Traditional models for retirement planning are fast becoming outdated and it’s clear that a singular approach won’t suit everyone. A focus on what you want to achieve is important.
How has retirement changed, and how should it affect the planning process?
Giving up work
Working in some way past the standard retirement date is fast becoming the new norm for those reaching State Pension age. According to research from the Pru, 2018 was the sixth consecutive year in which half of planned retirees will consider continuing to work.
For most, it doesn’t come down to finances. Just 8% said they could not afford to quit work. In contrast, 47% stated they enjoyed working. Many retirees plan to take advantage of the changing workforce and flexible working arrangements too:
- 26% hoped to reduce their hours or go part-time with their current employer
- 19% wanted to try to earn a living from a hobby or start their own business
- 14% planned to continue full-time in their current role
With more options in retirement, a gradual transition is attractive to many approaching the traditional retirement age. If continuing work in some form, whether you carry on your current role or work freelance, is something you’re considering this can help your pension savings stretch further.
When you think about the retirement your grandparents had, the chances are you have very different plans when you think about yours. Lifestyles have changed hugely in the last few decades and so has retirement.
Retirees are increasingly using their years after work to travel, try something new or turn their hand at entrepreneurship. With more free time, retirement is a life stage where you can indulge your passions and interests; it should focus on your goals.
The retirement income you need will be dependent on your aspirations. As a result, taking the time to understand what you want to achieve is important as you approach stepping back from work.
Accessing your pension
Pension Freedoms were introduced in 2015, offering you more choice and flexibility when it comes to accessing your pension.
You can withdraw the full amount from your pension at the age of 55; although usually, only the first 25% will be tax-free and this isn’t always advisable. You can also purchase an Annuity or use Flexi-Access Drawdown, where your money remains invested and you’re able to make withdrawals when you choose.
These freedoms allow you to tailor your pension income to suit your needs and the lifestyle you want to achieve. If, for example, you choose to continue working part-time, you may only withdraw small amounts to begin with. Alternatively, you may have higher income needs in early retirement if you want to pay off your mortgage, travel or help loved ones financially.
Life expectancy has improved, and many people now spend considerably longer in retirement. According to the Office of National Statistics, if you were a 65-year-old man in 1986, you could expect to live for another 13.6 years. By 2016, this had increased to 18.5. It’s a similar picture for women, rising from 16.9 to 20.9 over the same timeframe.
This point links to how you take your income; you need to take steps to ensure your pension will support you for the rest of your life. It can make it difficult to get your finances in order to continue providing a stable level of income. The changing life expectancy may also influence your lifestyle decisions, for example, working for longer.
Care has become a growing issue for those approaching retirement. Rising life expectancy offers more opportunities, but it also increases the chance of some form of care being needed too.
As a result, considering care during the financial planning process is essential. If care is needed it changes traditional income needs. In the past, it was common for the early years of retirement to be more active and, therefore, income needs were greater. As retirees settled into their new life, income needs dipped and stabilised. The cost of care means that many are now finding their income needs to rise again in their later years.
For those planning their retirement finances, the question of care may change how much income you take.
How financial planning can help
With retirement no longer following a linear path for most people, bespoke strategies are becoming even more important. Financial planning can help pull together all the different retirement priorities, lifestyle choices, and income options that you can choose from.
Modern retirement planning needs to be flexible to reflect your personal goals. If you’re approaching retirement or are already retired, please contact us. We can help you understand what you want from retirement and how your finances can support this.
Please note: 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.