By Steven Cameron
Over the two years since the Covid-19 pandemic struck, more people than usual have retired.
Some in their late 50s and 60s may have lost their employment or suffered health issues and felt they had no other choice. For others, it has been a personal choice after reflecting on their work-life balance and what’s most important to them. My company’s recent research showed that since the pandemic started, a quarter of people had changed their plans for retirement and around one in seven considered accessing their pension funds earlier than planned.
The decision on when it’s the “right time” to retire is not easy, and it’s very personal. It can be influenced by your health and ability to remain in employment, with many people struggling with physically or mentally challenging occupations. And an increasing number of over-50s are providing care to elderly relatives, sometimes alongside supporting their own children, the so-called “sandwich generation”.
However, there are also many benefits in staying in employment, not just financial but also social interaction and sense of purpose.
On the financial side, are your private or workplace pension savings enough to fund the retirement lifestyle you aspire to? The Pensions And Lifetime Savings Association has a useful guide on how much you need for a minimum, moderate or comfortable retirement. And rocketing inflation also raises concerns over whether after retiring, and likely relying on a fixed income, you’ll have enough to “keep up” or even just “get by”.
In the past, the question of when to retire might never have come up – it just happened. Many people assumed you retired when your state pension kicked in, which for many years was 65 for men and 60 for women. This was reinforced if your employer offered a defined benefit pension scheme paying out to coincide with state pension age. The flexibility to take benefits early or late, with monthly payments adjusted down or up, was often not understood. Also, employers could previously set a “normal retirement age”, effectively then pushing people out of the workforce.
In recent years, however,so much has changed.
First, employers now can’t legally enforce
a “normal retirement age”. Importantly, the state pension age has been increasing, with women particularly affected. It now sits at 66 for both men and women, increasing to 67 for those retiring in 2028, with planned moves to 68 in 2037. While intended to reflect longer life expectancies, many people are concerned they will be forced to “work until they drop” and are questioning if they can stop working before their state pension kicks in, drawing on private pensions or other savings to “bridge the gap”.
Added to this, outside of the public sector, defined benefit or final salary pensions are largely a thing of the past. While some may have some such benefits from a past period of employment, the trend is firmly towards “defined contribution” or “money purchase” schemes. There, you pick when you start taking an income, and the amount you can safely take depends on how much you have built up.
So, when can you “retire”?
Currently, most individuals can start taking a pension income from age 55, increasing to 57 in 2028. This need not be linked to “retiring” or stopping work and there is growing interest in “transitioning into retirement”, reducing hours or days worked. Some are taking a modest income from their pension pot to cover any shortfall between earnings and outgoings.
While this opens up new work-life balance opportunities, it is important to avoid paying more income tax unnecessarily. Also, starting to draw some pension can restrict how much you and your employer can pay into your pension in future years.
Importantly, just because you can start taking your pension from age 55 does not mean you should. Every year you defer retirement can make a big difference in the level of your pension.
Much depends on how much you have already built up and how much you are paying in. For example, someone aged 60 with a pension pot
of £200,000 could take an income of around £4,700 a year. However, delaying retirement
by one year, with ongoing combined individual and employer contributions of £300 per month, could boost that pension to around £5,400 a year. A three-year delay to age 63, could result
in a £6,700 yearly pension, an increase of more than 40 per cent.
What might the future hold?
The Government has been consulting on
what factors to consider when setting future
state pension ages. Because deciding when to retire is so personal, I have suggested people should be allowed to access their state pension up to three years early, at a reduced level to make this financially fair.
And one final thought, including for those
who have already retired: retirement is not an irreversible decision. On retiring, you will give
up the right to return to that job, but you can always seek new employment, which need not
be in your previous line of work.
Even so, deciding when it is the right time to retire can be a daunting decision and financial advisers can help you weight up all the many factors.
Steven Cameron is pensions director at Aegon.
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