It all used to be so simple. Workers reached retirement age, took their state and other pensions and lived out the rest of their days. Changes to state pension legislation and the pension reforms of early 2015 mean the rules of the game have changed and drawing a pension while still working is now a valid option for many.
Some see changes to pension legislation as a worrying development, others as an opportunity. In this post, we quickly summarize the rules surrounding the state pension before looking in more detail at pension drawdown arrangements.
State Pension Rules
The required retirement age was abolished by the Employment Equality (Repeal of Retirement Age Provisions) Regulations 2011. This means employers can no longer issue the minimum six-month notification for compulsory retirement except in certain (listed) occupations.
Workers cannot be forced to retire on the grounds of age alone. Should workers continue in employment they may delay taking the state pension, increasing their entitlement each year they delay by approximately 10 percent.
An Income From Pension Drawdown
Until the pension reforms (2015) most individuals, when nearing retirement, opted for an annuity paying a set income for life. However, given the advantages of drawdown and the low rates currently offered by annuities, drawdown is an approach currently favoured by many.
In drawdown, an individual controls an invested fund from which they make withdrawals (either as lump sums or regular income) depending on their requirements. There is evidence more individuals are using pension drawdown combined with an income from employment to fund their retirement. Often, the employment is part time allowing the individual to also enjoy some free time.
This approach offers several advantages including:
Flexibility: Rather than a fixed amount from a pension each month drawdown allows an individual to take what is required from a pension fund when it is required. Another income stream reduces the level of withdrawals on the drawdown fund while maximising funds available to cover lifestyle choices in the early years of retirement.
Long-term research shows those with flexible pension arrangements tend to take more from the fund in the early years after retirement with withdrawals reducing in later years. Demands on a pension fund may then increase again in later years to fund long-term care costs.
Maximise Funds: An income from employment reduces the demand on drawings from a pension fund allowing it to continue to grow until it is needed.
Market Volatility: Having another source of income may allow an individual to avoid taking income from invested pension funds while the markets are at a low point.
Social Benefits: A part-time job can allow an individual to transition from a working life to full-time retirement avoiding the traditional sudden stop that can cause a number of social, relationship and even mental health issues. The positive impact of the social side of a working environment should not be underestimated.
Once in drawdown, the amount that may be contributed to the pension fund each year is limited reducing the potential to grow the fund. It is also vitally important to consider the tax position. The tax implications can be complicated and will be covered in a future post.
The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances.