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Here we take a closer look at what flexible retirement is and whether it’s agood idea.
What is flexible retirement?
Flexible retirement shouldn't be confused with 'flexible access' or 'pension drawdown' which are ways of accessing your pension savings.
Flexible retirement is an agreement between you and your employer to change how you work as you approach retirement. It might be that you decide to reduce your working hours to give you more spare time to pursue hobbies. Or perhaps you might want to retrain to do something completely different in your later years.
Choosing to reduce your working hours is likely to reduce your income. But if you're over 55 (increasing to 57 from 6 April 2028), you could use your pension savings to make up some of these reduced earnings. This could give you more flexibility around your work as you get closer to retirement.
How can my pension fund a flexible retirement?
If you decide to take a flexible retirement, you'll probably need to think about how you'll make up your earnings. If you have a Defined Contribution pension, you have several options to access your pension savings.
Flexible access/Income Release/Pension Drawdown
Flexible access (sometimes called pension drawdown) lets you access your pension savings as you need them. At Royal London, our flexible access is called Income Release.
You can take up to 25% of your pension savings as a tax-free lump sum and keep the rest invested. You can then take remaining funds as a regular income.
Cash lump sum
You can also choose to take your pension as a cash lump sum whenever you need it. The technical term for this is ‘uncrystallised funds lump sums’ or UFPLS. Each cash withdrawal is 25% tax free with the other 75% subject to tax at your normal rate.
Buying an annuity
If flexible access or lump sums don't suit your needs, consider turning your pension savings into a regular income. This is called 'buying an annuity' or a 'secure income'. An annuity will keep going as long as you do and won’t run out.
It's worth noting that this option might not offer the flexibility you could need if you take a flexible retirement.
Is flexible retirement a good idea?
Flexible retirement is a big decision and not one that should be entered into lightly. It's often best to seek financial advice before making changes to your pension. If you’re not quite ready to seek financial advice, you can get guidance on your retirement options from PensionWise.
PensionWise is a free and impartial retirement planning service from MoneyHelper that’s backed by the government. It helps you understand your options when taking money from your pension, but it can’t give you financial advice.
What are the advantages and disadvantages of taking a flexible retirement?
As with anything, flexible retirement has advantages and disadvantages that you should consider before making any decisions.
Advantages of flexible retirement
- Flexible retirement could give you the opportunity to take life slightly easier without giving up your job.
- If you reduce your hours or switch to a lower paid job, you can continue earning a salary. Any gap in your ear
- Reducing your working hours might allow you to adjust to retirement while maintaining a decent standard of living.
- A flexible retirement might allow you to extend your working life. By reducing your hours, and topping it up with your pension, you might be able to work for longer.
Disadvantages of flexible retirement
- Some people won’t have enough pension savings to make flexible retirement practical.
- You may not have enough saved in your pension plan to be able to top up your income with it.
- Taking a flexible retirement too early might force you back to work if you run out of money.
- Taking money from your pension while earning money through employment could affect the rate you pay income tax.