If you want to phase your retirement it’s wise to plan ahead. There are plenty of online calculators to find out how much income your current savings may produce in retirement, and how long this may last. These can also show if you have enough to retire, or would need to continue working to boost your pot, and either phase or delay your retirement. Online budget calculators and tools such as those available at Citizens Advice and Money Helper can also help to show what your outgoings might be in retirement, to work out how much income you need.
O’Connor said: “You need to stretch what you have over a period longer than you expect to live for ideally. Remember that the early years of your retirement are likely to be more expensive than the later years, as you might want to make the most of travel opportunities and be able to get out and about more earlier on.
“Think in terms of three to five-year periods. How much work am I likely to want to do over the next five years? What about the following five?”
Some of your options if you’re considering phasing your retirement include:
Using drawdown to take a variable income: You could move your defined contribution, or money purchase pension to a drawdown plan from age 55 that gives you flexibility to decide how and when you take an income. Find out more in our article What is pension drawdown and how does it work? Plenty of online drawdown calculators can help you see how long your money might last depending on how much income you require, and the amount of tax-free cash you take out, and where your pension is invested.
For example, if you have other income from part-time work, you may choose to draw down a small amount, which you can increase or decrease over the years as needed. In short, you can start, stop or change the amount you withdraw. Beware, though, that your remaining fund will stay invested so it may rise and fall depending on the performance of the underlying investments. Hopefully, though, you will boost the value of your pension pot given enough time.
If any money is left in your pension drawdown plan when you pass away, this may be passed on to your beneficiaries tax-free, provided you’re aged 75 or less. If you’re older, you can still pass on your remaining retirement savings, but your beneficiaries will usually have to pay income tax on the money they receive.
Buying an annuity with part of your pension pot: You could use some of your pension pot to buy an annuity, or guaranteed income for life. This could be used to, for example, pay for essential bills, while you continue working to meet the cost of other day-to-day expenses. If you choose to buy an annuity it’s really important to shop around for the best rate, as you cannot move to a different deal if, for example, rates rise. How much you receive as an annuity income depends on the type you choose, age, and health along with various other factors. The longer you wait to buy an annuity, the greater the income you will receive. Read our guide Annuities explained.
O’Connor said: “Delay taking out an annuity if you think you can manage drawdown yourself for a few years – the prospect of a slightly higher income could be worth it. Bear in mind, though, that if interest rates rise and if average stock market returns start to decline, then a sustainable drawdown rate of 3% might actually not be that far off an annuity income anyway – you might want to compare annuity rates with a sustainable drawdown rate of 3%.”
Taking cash lump sums: You can also take cash from your pension, if you wish, as ‘uncrystallised funds pension lump sums’ (UFPLS). Every time you withdraw money, 25% of this will be tax-free, while the remainder will be taxed at your marginal rate for income tax purposes. The remainder of your fund stays invested, so the value of your pot could fall in value as well as rise.Consolidating your pensions to maximise flexibility: If you discover that you have an older-style pension that doesn’t offer enough flexibility to enable you to phase your retirement, you may want to consider moving your savings into one that does. However, this should be a carefully considered decision, as you may lose valuable guarantees or benefits, so it’s important to seek professional financial advice before taking this route. Find out more in our article Should I consolidate my pensions?Releasing equity from your home: You could consider unlocking some of the wealth tied up in the value of your property to ease cash flow if you’re phasing your retirement. This may provide you with a lump sum, regular income or a combination of both, depending on the equity release product you choose. You won’t pay the money back, with interest on top, until you die, or move into long-term care. Find out more in our article Equity release – what is it and how does it work?