Is early, or ‘phased’ retirement an option?
When seeking advice about pensions, consider flexible or phased retirement, a step-down model whereby people transition into retirement by reducing hours and drawing on a pension as they approach retirement age.
Early retirement – so long as it’s voluntary – is a dream for many of us. But if you’re seriously considering grabbing your parachute and getting out early, how do you know if you and your finances are ready for it?
Michael Cunningham of GSB Capital Ireland says that achieving early retirement depends on many factors: What age do you begin planning? What type of pension do you have? Do you have dependants? Other big costs? How much can you put away each month and does your employer contribute?
“The first step,” says Mr Cunningham, “is to assess your finances. You will need to understand your income, assets, expenses and debts, as these will all affect your budgeting and savings.”
Next, you’ve got to look at your pension. Is it doing all it can for you? A quick review might show that it’s not working as hard as it could. For instance, your pension might have funds that are performing below market averages, and some simple changes could help improve returns and, in turn, your retirement income down the line.
“Everyone knows they should save as much as they can for retirement,” says Mr Cunningham, “and yet people often prefer to save into their bank accounts in case they need something in the short term. One of the hugely overlooked aspects of pension savings and money doing more is getting income tax back from revenue.”
He points out that if you’re a higher-rate taxpayer, paying €10 of Additional Voluntary Contributions (AVCs) brings a refund of €4 to your current account from revenue.
“There’s a movement in pension planning called Financial Independence Retire Early (FIRE). The movement is built around saving and investing upwards of 75% of a person’s income, which is obviously a tough ask. However, the underlying idea is noteworthy as those willing to be aggressive and assess the best options for their money will be the ones to retire earlier.”
If early retirement is a bridge too far, you could think about flexible or phased retirement. This is a step-down model whereby people transition into retirement by reducing hours and drawing on a pension as they approach retirement age.
According to a recent survey from of Independent Trustee Company (ITC), 69% of financial advisers reported a rising interest from clients in this more gradual retirement model.
“Flexible retirement essentially allows an employee to reduce their working hours or take on a less senior position in the run-up to retirement,” says Glenn Gaughran of ITC, “so they have more time to pursue hobbies and interests, spend with or care for family, volunteer or even retrain.”
He says that advisors are seeing more people looking for a middle ground between full-time work and full retirement. The ability to tap into pension savings while scaling back work is resonating, especially among those who want to maintain lifestyle stability without burning out.
“Interestingly, even those advisers who haven’t yet seen a rise in demand anticipate it’s only a matter of time before demand picks up. This points to a shift in expectations around what retirement can and should look like.”
Mr Gaughran acknowledges that it’s not going to work in every job, but when it does work, flexible retirement can be hugely beneficial.
“Benefits can include a better quality of life, improved health, less stress and the ability to work for longer than would have been the case if the individual continued to work full-time. With some employees, the reduced working hours that come with flexible retirement can even lead to better productivity.”
Just as with early retirement, the first step towards flexible retirement involves establishing its financial feasibility.
“Given the reduced working hours, flexible retirement typically means a drop in income and so it is not always financially feasible for people. Having an old or supplementary pension in the wings could make flexible retirement financially possible, depending on how well resourced the pension is and whether it can be tapped into in order to supplement an individual’s reduced income.”
You’ll also need to know how early you can access money in your pension scheme. It may be possible to access money in a pension from the age of fifty without fully retiring, depending on the type of pension and the rules of the scheme. If you have an old occupational pension scheme, you can usually start to draw down money from it once you reach the age of fifty – as long as you’re no longer working with the employer who provided that scheme.
If you have a Personal Retirement Savings Account (PRSA), active occupational benefits or personal pensions, as long as you wait until the age of sixty, you can ‘retire’ and draw down from those pensions - and continue working without having to actually retire.
You’ll also need to know the tax implications.
“In flexible retirement,” says Mr Gaughran, “you’ll be likely supplementing your reduced income with money from a pension. Taking money from your pension at the same time as earning money through employment could affect the rate you pay income tax at by moving you into a higher tax band.”
Remember too that the amount of tax relief that you can get on pension contributions is not just restricted by your age but also your total earnings, so you may not be able to get as much tax relief on pension contributions in flexible retirement as you had become accustomed to, particularly if there is a significant drop in your income.
You’ve also got to determine the impact on your overall retirement income. The pension you receive from an old pension scheme will likely be lower if you opt for flexible retirement than if you continued working until normal retirement age, as there will be less time for the funds accumulated to benefit from any investment growth.
Being on lower earnings could also impact your ability to fund any pension you continue to contribute to in semi-retirement as you won’t have as much disposable income as you previously would.
And be mindful of longevity. If you live into your nineties – or later – you might regret accessing money in one of your pensions early on as you might run out of money before you die – particularly if your other pension investments don’t perform as well as you’d hoped.
Mr Gaughran says: “The job-for-life is largely a thing of the past so it’s not unusual for workers today to have a pension or two from previous jobs, in addition to the pension they’re saving into with their current employer. This means that it may be more financially feasible for people to take up the option of flexible retirement today than would have been the case in the past as they could have an old or supplementary pension to tap into.”
Flexible retirement, however, is not a decision that should be taken lightly. It’s important to fully understand its impact on your income when you fully retire and on your ability to have a comfortable standard of living at that stage of your life.
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