A generation ago, if you’d decided to retire the chances are you’d have walked out of your workplace on a Friday afternoon, and woken up on Monday with the rest of your life ahead of you.
These days, many retirees are taking a very different approach. As attitudes to work and retirement change – and these attitudes have been accelerated by the Covid pandemic – more and more people are electing to “semi-retire”.
Indeed, it’s something that the chancellor recently encouraged in his spring Budget, arguing that “older people are the most skilled and experienced people we have”.
Deciding to “semi-retire” could improve your emotional wellbeing, while also helping you to continue to build up your fund for when you do eventually decide to stop working. And, in the Budget, Jeremy Hunt announced a key measure to support this. Read on to find out more.
9 in 10 people “much happier” since reducing their working hours
A recent study by the insurer Aviva has revealed that more than 2 in 5 (44%) 55 to 64-year-olds plan to move into “semi-retirement” before they reach the age of 65. This will allow them to draw on their pension savings while continuing to work part-time.
If you want to retire early, it’s likely because you want to take advantage of more freedom while still being physically fit and well enough to enjoy it.
Aviva say that semi-retirement can offer a mutually beneficial solution for both you and your employer. You can make choices about maintaining a healthy lifestyle and income in retirement, while your employer benefits from retaining the expertise and knowledge of a skilled person within the workforce.
“Semi-retirement” could mean:
- Reducing your working hours and staying on part-time
- Moving into a consultancy or mentoring role
- Taking on a new job at reduced hours
- Starting your own business.
Aviva report that more than 9 in 10 (91%) people described themselves as “much happier” since reducing their working hours. Staying in work can also boost your sense of worth, improve your social connectivity, and have a positive effect on your emotional wellbeing.
Semi-retirement can supplement your pension income
As well as all the positive mental benefits, semi-retirement can also offer some valuable financial benefits.
Most obviously, you can supplement your pension income with earnings from employment or self-employment. This means you don’t have to draw as much from your pension, meaning the fund will likely sustain your lifestyle for longer.
In addition, you can continue to make tax-efficient pension contributions to your fund from your earnings. As well as benefiting from tax relief on your contributions at your marginal rate – providing an instant 20% or more boost to your fund – your employer may also make contributions.
Furthermore, leaving your pension savings invested gives you the potential to benefit from investment returns on the total value of your pot.
A key Budget change that supports you if you want to semi-retire
In his spring Budget, the chancellor also announced a key change to pensions legislation designed to encourage older people to remain in the workforce or to return to work.
A little-known tax charge called the “Money Purchase Annual Allowance” (MPAA) restricts the amount of tax-efficient savings you can make if you have started to flexibly draw from your defined contribution (DC) personal pension.
You will normally trigger the MPAA if you:
- Take your entire pension pot as a lump sum or start to take lump sums from your pension pot (note there are special rules for “small pots”)
- Move your pension fund into flexi-access drawdown and start to take an income
- Buy an investment-linked or flexible annuity where your income could go down.
In previous tax years, the MPAA has been set at just £4,000. However, Jeremy Hunt announced that this would rise to £10,000 in the 2023/24 tax year.
So, if you have started to take lump sums or a flexible income from your fund, you will now be able to make tax-relievable contributions of up to £10,000 (in 2023/24) to your pension fund. This could help you to build back your fund if you have drawn from it, or boost your future lifestyle, all with the help of tax relief.
Remember also that the MPAA won’t normally be triggered if:
- You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases
- You take a tax-free cash lump sum and put your pension pot into flexi-access drawdown but don’t take any income from it.
So, choosing one of these options will mean you can retain your full pension Annual Allowance of £60,000 (2023/24), enabling you to make significantly higher pension contributions from earnings while retaining tax relief.
Get in touch
If you are thinking of taking “semi-retirement” and want to establish whether it’s the right financial option for you, please get in touch.
Pension allowances can be complex, and falling foul of the rules could see you face a significant tax charge. We can help you to work out the most tax-efficient and sustainable income strategy for you.
Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
