The over 55s could easily ease the financial problems of retiring if they knew more about the options of phasing in pension payments, claims a new report.
Too many over 55s regard retirement as either unwillingly being forced to remain at work or a sudden stop.
Research suggests that some of the mechanisms for more of a gradual lifestyle and financial shift to retirement are already in place but too many people approaching retirement are unaware of their options, according to a report from think tank the International Longevity Centre-UK (ILC).
Gradual retirement offers a wide range of opportunities for older workers to downshift in their current job, move to self-employment or part-time work.
Benefits of deferring the state pension
Over 55s who gradually slip in to full retirement also help the government’s goal to push back the state retirement age.
One of the main findings of the ILC survey was 59% of over 55s were unaware they could defer drawing their state pension in return for higher benefits, while 40% said they would consider delaying retirement if the option was available.
If the government better publicised the finer points of the state pension scheme, the over 55s would realise that they do not have to start payments at the state pension age.
Passing on drawing the state pension for a year increases the amount due by 1% for every five weeks of payment is deferred, up to a maximum 10.4% for the year.
The deferred pension could then be drawn as an enhanced payment or lump sum.
The calculation is slightly different for a lump sum payment – which is paid at 2% above Bank of England base rate.
Tax-free pension drawdown
Another gradual retirement financial option that can bridge the gap between fully and partially is pension drawdown.
Another 66% of over 55s are in the dark about easing retirement finances with pension drawdown.
The new drawdown rules that kicked in on April 6, 2011, lets over 55s take income from pension funds while the fund remains invested and continues to benefit from any fund growth.
The idea is someone can work a shorter working week and compensate the loss of hours by drawing a small amount of income from the pension fund to balance out their finances.
No minimum drawdown has to be taken, irrespective of age. Under this rule, not only can retirement savers take small incomes or lump sums, but they can leave their pensions untouched while they continue working.
Drawdown payments that cumulatively come to less than the tax-free lump-sum amount allowed under the scheme may also be tax-free as well.
The ILC findings also revealed some other insights about how the over 55s view retirement:
• 46% would delay retirement if employers offered more support for reducing working hours or flexible working
• 36% would put off retirement if the state pension age is increased more than already planned
• 55% support accessing part of their state pension early, in return for a lower pension when they retire in full.
• 67% are against workers above the state pension age continuing to pay National Insurance Contributions
The full survey results are published in the ILC’s report Gradual Retirement and Pensions Policy, by Dr Craig Berry, a senior researcher at the think tank who previously worked with the Treasury. Link to full report: Gradual retirement and pensions policy
Retirement should not mean poverty
Dr Berry offers a number of conclusions and recommendations in the report, including:
• Making a more positive case for extending working lives to stop the over 55s viewing retirement as a watershed that means a drop in income and living standards rather than recognising the benefits of staying in work longer
• Investigating a ‘graduated state pension’ so people wanting to slow up could access part of their state pension – even if they would therefore receive lower pension payments when they retire in full.
• Promote pension tools that already encourage longer working lives, like state pension deferral, as many over 55s would keep working if they knew the rules better
Baroness Sally Greengross, the ILC chief-executivesaid “We know that financial circumstances play a huge part in retirement decisions, and so the pensions system is clearly having an impact on the path to retirement that is chosen by individuals.
“Retirement should be seen as a process, not an event. We must do whatever we can to increase the options available to workers entering later life, so they are able to continue contributing to the economy in a sustainable way.” The International Longevity Centre-UK is a leading independent think tank tackling issues on longevity and demographic change.
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