The last few years in the UK have come with a series of unexpected events which have not only had an impact on the way we go about our everyday lives, but also the way we look at our finances.
The pandemic has been an unprecedented unknown which nobody; professional or otherwise, would have realistically been able to factor in when it came to planning their retirement. Top that off with uncertainty over Brexit and now a cost of living crisis, is there any wonder that many may be thinking that they simply can’t afford to retire?
Are people retiring later?
Since March 2020, it appears that the trend has been quite the opposite. According to the Financial Times, the number of people aged 50 - 64 who are not in work has risen by almost 250,000 since March 2020. This unsurprisingly appears to have been mainly pandemic driven and includes those who were forced out of work due to job cuts as companies struggled with the pressures from a downturn in business. However, for some it was an unexpected opportunity to live a more frugal lifestyle, with expenses such as commuting and eating out no longer being a necessity, they found that saving for the future was a lot easier and so opted to take early retirement.
There is of course the possibility that this trend will reverse and start to head in the opposite direction with people choosing to retire later, especially given the current challenging climate. Data from the Institute for Fiscal Studies (IFS) suggests that up until COVID-19 hit, the amount of people working in the UK at age 65 had actually increased as a result of concerns over the rise in State Pension age, currently 66 but rising to 67 by 2028. However, with restrictions now lifted, we’re able to go out and spend again, but this new sense of freedom is against a backdrop of a nationwide cost of living crisis. With an increase in energy bills, a rise in inflation and a war raging in Ukraine, there are so many unknowns influencing the current cost of living. It will likely be a factor in why many people will start to consider when they may retire.
The rising cost of living may not only affect your everyday income and outgoings, but could also affect your pension savings. The combination of the above factors is driving down market prices, which you’ve probably seen reflected in the value of your pension pot. If your investments aren’t performing so well, then naturally you may want to wait until the situation improves which may mean delaying your retirement.
What should you consider when it comes to delaying your retirement?
For most people, choosing whether to retire later or not isn’t a decision that can be made easily. There are many things to consider before making such a life altering change. On average, people in the UK are estimated to spend 39 years of their life in work so it might be daunting to think that you’d need to spend even longer at work. However, if staying as a part of the workforce is the difference between enjoying a more comfortable retirement and not, then it may be something you would want to seriously consider.
Let’s take a look at some of the things you may need to think about before making a decision.
1. Will retiring later make me any better off financially?
Without future planning, it’s difficult to calculate how far your pension will go, which is why it’s important to start this as early as possible so that you are aware of what you can expect to receive if you retire at a certain age and can plan accordingly.
On top of the specific age you want to retire at, there are also options with how you want to take your savings, whether you take it all as a lump sum when you retire or spread payments out over the remainder of your life as a regular income.
You may find that if you plan to retire at your normal State Pension age, that your pension doesn’t stretch as far as you had hoped. The amounts you receive will be affected greatly by how long you or your employer have been contributing, so the first thing you may want to take a look at is if you feel you have enough put away (or not) to enjoy the kind of retirement you want. If you’re a PensionBee customer, you can use our retirement planner by logging in to your BeeHive to help you estimate how long your current savings might last.
It’s important to remember that a pension is a long-term investment that can see peaks and troughs throughout its lifetime. In the short term, values can drop, but the longer you’re able to leave it invested, the better chance you are giving your pot to recover as markets improve. Although the current outlook may continue to be rocky for the near term, there’s also reason to be hopeful that pension balances will rise again.
If you have multiple pots from several different employers, then it might make it easier to see exactly how much you’ve accumulated in total by consolidating your pensions with a provider such as PensionBee. If your savings are spread out in various pots of smaller amounts, it can be tricky to work out how long that particular pension will last. If you’ve got one pot with all of your pension savings together, you could find it easier to calculate whether you have enough to retire at your desired age and will benefit from the effects of compounding.
2. How long do I delay my retirement for?
This is something only you can decide and it may depend on how long it could take to see an increase in your savings that aligns with your retirement goals, as well as how much longer you realistically see yourself working for. These decisions are personal and will entirely depend on your individual circumstances. Whether it be one year, five years or even longer; each year that you delay withdrawing from your pension, could make a difference to what’s saved up in your pension pot. For example, if you are 65 years old and delay until you are 70, you might see a fairly decent return depending on your contributions and if there is an uptick in market performance, but you’ll need to weigh up if you are happy to wait as well as be aware that market conditions can change - for better and for worse.
Of course, if you feel that your pots just need a small boost to get you over the line to retirement, you could opt to just push back for a year or so, or even a few months. This can also be the case for your State Pension; though it is important to remember the way you contribute to this is entirely different from your personal and workplace pensions and is based on your National Insurance contributions. For every year you delay your State Pension, there’s the possibility that you’ll receive up to 5.8% extra, or 1% for every nine weeks that you hold off from claiming.
3. Should I be budgeting elsewhere?
Delaying your retirement isn’t the only option out there and it won’t be something that’s possible for everyone. So it’s good to consider the alternatives available before you make the decision to keep working a little longer.
Scott Moxbray, Co-founder and Chief Communications Officer of Snoop says: “I think we worked out at Snoop that people spend £640 a year on subscriptions. And you just know that some of those are going unused.”.
As a result of the cost of living crisis, a lot of people are starting to look at where they can trim their expenses such as by cancelling unused subscription services and gym memberships. PensionBee’s Pension Confident Podcast recently discussed whether people actually need to keep hold of all their subscriptions.
Depending on your pension provider, you may have the option of taking a drawdown pension. This means that you can begin taking money from your pot as and when you need it, while it still remains invested. So if you aren’t quite ready to retire fully, you could take a part-time working arrangement which would allow you to continue contributing to your pension, with the security of being able to take some cash whenever you feel it’s required.
It’s also worth reminding yourself that if you do wish to take full retirement, that doesn’t mean you have to immediately withdraw your pension. If you feel like you can afford to leave your money invested for a bit longer after you’ve retired, there’s no obligation to take that money from your provider the moment that you leave the workforce.
4. What type of pension do I have?
As with all contracts you sign, pensions come with a small print. So it’s important to know what the rules are surrounding the age you can retire and also to make sure that you aren’t missing out on any benefits by moving your retirement date.
Many pensions do make allowances for both early and late retirement. However, there are often limits to this, which are important to check in your policy details. The earliest age is normally 55, which will rise to 57 by 2028 although some have a Protected Retirement Age which allows you to take your pension even earlier than this. It’s also relatively common to see a late retirement limit of 75 which may hinder your plans if you’re looking to delay your pension quite significantly.
There are a number of special benefits that have the potential to be lost if you decide to take your pension later which are worth checking for too. You might have a guaranteed annuity rate or have a guaranteed growth rate. It is also handy to know if your pension is either defined contribution or defined benefit which affects the way in which your savings are accumulated.
Still unsure of what to do?
Ultimately only you will know whether delaying your retirement is the right course of action for you and for many this won’t be solely a financial decision. It can be easy to forget that your health and happiness should also play a role in making these important life choices. It may be that the type of work you do is too physically demanding to continue past your desired retirement age or that the stress that comes naturally with some work isn’t good for your mental wellbeing. People with chronic health conditions may not have the luxury of being able to make the choice of which age to retire at, if this is the case for you then it’s always advisable to speak to an appropriate health professional.
Making decisions around taking your pension can be overwhelming and if you feel unsure about what to do as you are nearing retirement, the government offers a free appointment with their Pension Wise service to those over 50 to discuss your options. Taking independent financial advice can be a good way to provide clarity on how far your savings will go, and help you to decide how you can retire as comfortably as possible.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
