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Andrew Tully: How to plan for older workers

Through choice or necessity, the attitude to retirement is changing and so too must the financial planning around it

Recent research we have undertaken suggests five million over-50s plan to continue working after reaching traditional retirement ages, with 300,000 of these people planning to never stop.

Different people will have different views on those statistics. Personally – as much as I love my job – I hope to get to a time where I can stop. But it is fantastic that those who want to are able to continue working.

That said, there are some who are doing it out of necessity rather than choice. In both cases, people need help working out what it means for their finances, including trying to make sense of complex pension rules.

The reasons people want to continue working are largely positive, with the most common being that they actually like doing so. It gives them a sense of purpose and avoids boredom. Many intend to gradually ease off work, showing the day of cliff-edge retirement is well and truly receding.

A less common answer is the need for extra money. However, this was mentioned by around two in five people, so it is still a significant driver. Interestingly, women are more likely to be motivated by this than men (46 per cent of women compared to 37 per cent of men), which is perhaps indicative of average female pension savings being lower than their male counterparts.

One of the huge benefits of pension freedom is the ability to combine the appropriate level of flexibility and certainty from a pension pot to match changing income needs as people move through retirement.

People can also access their pension pot at relatively young ages if they have a specific need; for example, to pay off expensive debt or to tide over those who have been made redundant.

And FCA statistics show people are making use of that, with over 40 per cent of drawdown pots being accessed for the first time between ages 55 and 60.

This changing attitude to retirement has a clear impact on financial planning and the need for solutions that easily allow the phasing of benefits as people take tax-free cash and/or income gradually rather than all at once.

MPAA

Other key areas of planning include state benefits and the much-maligned money purchase annual allowance.

There is little in the way of defence for the MPAA, currently £4,000 a year. It seems unnecessary, unhelpful and runs counter to wider Government savings policy. There is a clear desire for more people to save for their retirement, yet the MPAA restricts the ability of many to do that in later life, possibly when they have the greater means and impetus to do so.

It is easy to envisage an individual being made redundant at age 55 and using their pension pot to tide them over while they seek another job. Yet when they get a new job, say, with a salary of £45,000, their intended pension payment of 5 per cent salary alongside the matching employer contribution means they breach this arbitrary limit.

State pension

Another key area for those continuing to work later in life is whether to take their state pension or not. The compensation for deferring is significantly less generous than it was before April 2016. People get an additional 1 per cent of pension for every nine weeks they defer and there is no longer the option to take the additional benefit as a lump sum.

For example, if someone did not take their state pension for one year, they would get a future state pension which is 5.8 per cent larger than it would have been. This means people will need to live around 17 years before the money they receive from their higher state pension outweighs the loss of the first year of income.

While there may be benefits in deferring, for example, reducing taxable income for those who keep working, there is a risk people will lose out financially. Taking the state pension and reinvesting any income which is not needed in an Isa or a pension (perhaps for a partner if the MPAA is an issue) may be a suitable alternative. It is clear many people want, or need, to work beyond retirement age. In these cases, the need for advice remains crucial to avoid the pitfalls around tax and state benefits.

Andrew Tully is pensions technical director at Retirement Advantage

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