The Institute of Economic Affairs think tank said recently that the lifestyle and financial changes brought about by retirement can result in “a drastic decline” in health. Experts in the field estimate that retirees stand a 60 per cent greater chance of physical ill health and a 40 per cent higher risk of lapsing into clinical depression.
Some have gone so far as to call for the official retirement age to be scrapped in recognition of the economic and social challenges facing the UK today.
But that does not mean you automatically face the stark binary choice of retiring into a life of inactivity and ill health or “working until you drop”. That is because one of the benefits of phased retirement is that it enables you to crystallise your pension investments in stages and so make the transition into full retirement easier and healthier.
Instead of using your pension pot to buy a one-off lifetime annuity, the flexibility inherent in a phased plan allows you to divide your money into segments, each of which can be converted to income together with a tax-free lump sum whenever you choose. That, combined with the fact that pension providers are becoming ever more innovative and flexible in their approach, makes it an attractive option.
Further flexibility to reduce income tax may be available by combining phased segments with income drawdown.
Like everything else, however, phased retirement has both advantages and disadvantages, and should be undertaken only with the guidance of an independent financial adviser qualified both in retirement planning and pension investments.
The advantages of easing your way into retirement mean that your exposure to tax can be controlled more efficiently while generating income and freeing up money for special purchases such as holidays.
Also, different pension options, such as inflation-proofing and widow(er)’s pensions, can be chosen with each annuity purchase, while any remaining funds can be passed on to dependents or paid as a tax-free lump sum on death before age 75.
Among the potential disadvantages are the fact that, like any form of investment, actively managed pension pots can fall in value as well as grow. A fall in value could result in a significant reduction in income. Also, some investment in equities may be needed to ensure yields match future needs, and this might not suit the risk profile of some older people.
Another risk with phasing your retirement is that future annuity rates cannot be guaranteed and could be worse than when you begin to retire.
Phased retirement plans can be complex and need to be monitored closely and reviewed regularly. For this reason, anyone considering easing themselves into retirement should do so only with the expert retirement service skills of a pension investment services specialist such as The Whitehall Partnership.
For further advice and to arrange a no-cost initial meeting, call us today on 0845 43 49 250.