Retire at your leisure

Today’s pensions allow for a lot more flexibility when scaling back on work, says David Prosser.


It's now easier to manage work and play
(Image credit: monkeybusinessimages)

Today's pensions allow for a lot more flexibility when scaling back on work.

Arecord number of people are currently in work, according to government figures. One part of the explanation for this phenomenon is that more older people than ever before are now employed: there are a little over 1.2 million over-65s working, up 67,000 on 12 months ago.

For some of those people working will be a positive choice, while others will feel they had no option but to work into their retirement years for financial reasons. Still, as life expectancies continue to increase, working longer will become more widespread. That doesn't have to mean working in the same way as you always have: the pension system now makes it much easier to move gradually into retirement.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Take your time

With private pensions accessible from age 55 and state pensions payable at 65 though both ages will rise over time we are likely to reach a stage when people will move out of work over the course of a two-decade period. Over time, they'll reduce their hours, replacing some or all of their lower income by beginning to draw on their pension benefits. Thankfully, there are various options for how you structure your pension income. An income-drawdown arrangement lets you take as much or as little income as you want direct from your pension fund, while the rest of your money remains invested and hopefully keeps growing. Alternatively, you could use some of your pension fund to buy an annuity paying a guaranteed income, leaving the rest to grow until you retire completely.

Another option is to leave your private pensions untouched and depend only on your state pension while you're still working, assuming you've reached age 65. One advantage of this approach is that it makes it easier to carry on contributing to your private-pension savings from your salary; once you've accessed your private pension, you're normally limited to a much lower annual-contributions allowance thereafter, which can be restrictive.

One issue to consider is that state- and private-pension benefits are potentially subject to income tax just like any other income. If you're receiving them on top of a wage, you may pay more tax than you had expected.

Still, from age 65 onwards you no longer have to pay national insurance contributions. And you can manage your exposure to tax on a private pension: you can take 25% of the fund tax-free, with different structures allowing you to do this with a lump sum or regular income.

Pensions dashboard gets green light

A new online service that lets pension savers see all their plans on a single screen should be up and running next year, according to the government. The much-delayed "pensions dashboard" will be hosted by a new agency, the Single Financial Guidance Body, ministers said last week, with the pension industry meeting the costs of the initiative.

The pensions dashboard is widely considered a crucial step towards enabling people to make better retirement planning decisions. With the average worker now opening pension plans with 11 different employers over the course of their working life, many people have little idea about how their savings are progressing when considered as a whole.

However, while it is a relief the dashboard has finally got the green light from the government ministers at one stage contemplated withdrawing from the project there is nevertheless widespread disappointment that people's state-pension entitlements won't be available on the platform, at least initially, leaving the summary of people's expected retirement income incomplete. State pensions offer a foundation for many savers' provision for retirement, but the government has not been able to commit to providing this data in time for the dashboard's launch.

Compensation for savers wanting to transfer

The compensation bill for savers losing out because of problems with transfers from final-salary pension schemes is set to continue rising as the Financial Ombudsman Service opens a new front in the battle. It has just ordered a financial adviser to write a £50,000 cheque to a customer complaining about advice he didn't receive.

The client had asked his adviser to provide a recommendation on whether he should accept a generous transfer offer from his employer to move his pension out of the company's defined benefit (DB) scheme. After considering the request, the adviser decided they did not wish to offer advice and the client was forced to seek help elsewhere. But by the time he'd done so and told his employer he wished to accept the offer, it had expired; the new transfer value offered was substantially lower.

The ombudsman ruled that the first adviser took too long to turn down the request for advice, leaving the client with little time to make alternative arrangements. This was what caused the loss, the Ombudsman said.

It is a ruling that might affect more people than you'd imagine. Such is the regulatory firestorm around transfers out of guaranteed DB pension schemes that advisers are routinely refusing to offer advice, even though savers cannot legally transfer without having received independent counsel if their benefits are worth more than £30,000.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.