Should you delay or come out of retirement?

The rising cost of living has stretched many of us financially. Unfortunately, it has coincided with turbulent stock markets, which have hit the value of pensions savings. As a result many people approaching retirement or in retirement face the double whammy of higher costs and lower pensions savings.

Against this backdrop, pension withdrawals have increased substantially. Financial Conduct Authority (FCA) data shows the overall value of money withdrawn from UK pension savings pots rose by 22 percent, to £45.6 billion, between 2020-21 and 2021-22 (1).

It’s a sobering thought that people may be withdrawing more from their pension pots at a time when many pension pots have fallen in value. It means they could have smaller pensions savings to fund their retirement, increasing the chances of running out of money before death.

As a result, some of us may face the decision to continue to work for longer than planned or to come out of retirement. Recent data shows working-age people have in fact been coming out of retirement in the past year: the number of retirees aged 64 or under fell by 9.1 percent between March-May 2022 and March-May 2023 (2).

So, if you are facing a potential retirement shortfall due to these circumstances, should you delay retirement or unretire?

There is no simple answer to this question, as you need to consider a range of factors. These include your life goals, your personal circumstances, your financial requirements, whether you want to leave an inheritance, and your financial assets. Financial assets cover anything of notable value, including property (your house and other physical items of value), savings, investments and pensions. This is a complex area and you may benefit from getting a financial adviser to help you here.

Defined benefit pensions

One thing to note: you may be unaffected by current circumstances if your main pension is a defined benefit (DB) scheme with an income that rises in line with inflation. This is because DB pension income is based on your salary and the number of years you contributed to the scheme rather than the value of a pensions savings pot.

Even so, if you do opt for late retirement, then your DB scheme might consequently increase your pension income, as it will be paid out over a shorter period. Moreover some, but not all, schemes offer back-payments based on what you would have received between your normal retirement date and the later one.

You may, though, want to find out if taking it later could lead your DB scheme to impose restrictions or additional charges, or if you could lose investment bonuses or guaranteed income. The Money Helper website suggests you should first check with the administrators of your DB scheme, as there may be no benefit from payment deferral (3).

Defined contribution pensions

In contrast to DB pensions, the amount of retirement funds built up in defined contribution (DC) pensions depends on how much you and your employer contributed and how these pension investments performed. So DC pension holders can be more exposed to higher living costs and diminished pensions savings than DB pension holders with inflation-linked incomes.

Focus on your life goals

At Schroders Personal Wealth (SPW), we believe it is important to focus on your life goals rather exclusively looking at how you manage your various investments, savings and assets. If you can achieve your life goals despite rising costs and lower pensions savings, then you may not need to alter your financial arrangements or your lifestyle.

But if these factors do impact your life goals, then you might want to consider delaying or coming out of retirement. You may, though, find you can work on a part-time or flexible basis, rather than full time.

Delaying your retirement or unretiring can boost your pension drawings for several reasons. First, your pension savings won’t need to last as long, as you would have a shorter period in retirement. In addition, working for longer means you can contribute more to your pension and allows more time for pensions savings to grow. Even so, the value of pensions savings can go down as well as up and there is no guarantee that they will rise.

Pension rules

People planning to unretire who already receive personal pension income should note that they would subsequently only be allowed to make more limited tax-efficient pension contributions. I’ll now explain why.

Let’s suppose you have not yet started to draw on your DC pension. In this case you can, each year, typically put up to £60,000 or the level of your salary (if this is less than £60,000) tax-efficiently into a pension until the age of 75. But, once you have started to draw on your DC pension, the amount you are allowed to contribute tax-efficiently into your DC pension falls to just £10,000 a year. As a result, your taxable income may be higher than you anticipated when you return to work, and you may even end up in a higher tax band. For some of us, this could reduce the attractions of unretiring.

Moreover, while the £1,073,100 lifetime allowance has recently been removed for pension savings, it still has a place when it comes to tax-free pension withdrawals. We explain what this means in our article on pensions allowances.

Deferring a State Pension

Delaying retirement might also allow you to defer taking your State Pension, which can lead to increased monthly pension income. For people who reach the State Pension age on or after 6 April 2016, their State Pension will increase for every week they defer, as long as they defer for at least nine weeks. Their State Pension will rise by the equivalent of 1 percent for every nine weeks deferred or at just under 5.8 percent for every 52 weeks deferred (4).

But you should check that receiving an increased State Pension won’t affect other government benefits you may receive, such as Pension Credit. Pension Credit is separate from your State Pension and provides extra money to help with living costs if you’re on a low income and of State Pension age (5).

There are some fairly straightforward alternatives to working for longer or returning to work. You could, for example, reduce your spending, perhaps by driving a less expensive car, shopping at a lower-cost supermarket, or taking fewer or cheaper holidays. Moreover, you could draw on any non-pension investments you may hold to make up for any income shortfall, if suitable to your personal circumstances.

In addition, you could downsize on your home, and use the resulting capital to fund any income shortfall. You could even consider using equity release on your home.

Take advice

In the end, if your life goals are impacted by the rising cost of living and the fall in value of pensions savings then you may well have to make changes to your lifestyle and financial arrangements. Indeed you may decide to delay your retirement or unretire. But this could be one of several options to consider and finding the arrangement that’s right for you can be challenging.

A financial adviser can view your circumstances and life goals holistically and help devise an appropriate plan of action if you are affected by higher costs and lower pensions savings. In particular, an adviser can identify any potential future income shortfalls and help you work out how they might be filled. At SPW, one of our principles is to have regular advice reviews. Such reviews can be particularly beneficial in challenging times.

Sources:

(1) Financial Conduct Authority, ‘Retirement income market data 2021/22’, 6 October 2022.

(2) Office for National Statistics, ‘LFS: Econ. inactivity reasons: Retired: UK: 16-64:SA’, 11 July 2023. Schroders Personal Wealth calculations.

(3) Money Helper, ‘Retiring later or delaying taking your pension pot’, 26 July 2023.

(4) Gov.uk, ‘Delay (defer) your State Pension’, 27 July 2023.

(5) Gov.uk, ‘Pension Credit’, 28 July 2023.