If your pension is smaller than you’d hoped it would be, you might be considering postponing your retire-ment. Deferring retirement could enable you to continue paying in to your pension and hopefully benefit from further stock market growth.

Here, we look at the financial impact of delaying retirement. A financial adviser can help you to decide on the best course of action, by considering your personal circumstances.

What difference could delaying make?
Delaying retirement by several years could bring significant financial advantages. For example, consider a 55-year old earning £50,000 gross per year, with a £400,000 self-invested personal pension (SIPP), who can choose between retiring next month and delaying for five years.

Our analysis shows that if they are planning to retire at age 55 on half of their current income, or £25,000, they could risk running out of money at age 76. However, if they work until age 60 and reinvest growth within the SIPP, save their excess income and add a one-off £10,000 lump sum to the SIPP, their funds are likely to last until age 92. These calculations are based on pension growth of 5% per year after charges and inflation at 2%.

You have more time to save
By delaying retirement, you could continue to get tax relief on pension contributions at your marginal rate of income tax, until age 75. That’s if you are in a position to carry on saving.

Your pot and contributions will have the opportunity to grow over a longer period of time, potentially providing a greater income in retirement. And if you can add the occasional lump sum – for example, if you have paid off your mortgage and will not spend all your income – you could further boost your retirement savings.

You could get more state pension
The state pension age for both men and women is currently 66, but it is gradually increasing and will reach 67 by 2028. The full state pension is £179.60 per week. However, if you aren’t going to depend on your state pension for essential outgoings, you could defer payment.

You earn an additional 1% on your state pension for every nine weeks you postpone taking this, or around 5.8% more for every year you delay. However, you should check that receiving a greater amount in state pension will not impact on other benefits you may receive, such as pension credit.

You can obtain a state pension forecast to see how much you would receive as a starting point.

You could retire gradually
You might want to switch to working part-time, or flexibly, and keep your pension fully invested while drawing on other savings and investments.

Alternatively, you could opt for income drawdown. This enables you to keep your pension savings invested while you draw an income from your investments when needed. This way, you can make small withdrawals while continuing to work and earning an income, giving your investments the opportunity to grow and recover any lost value.

You might benefit from working longer
The traditional life path of full-time employment followed by a long period in retirement may be long gone. People are living longer, healthier, active lives – and you might want to continue working in some form, past retirement age, for your general wellbeing.

A period of part-time work and phased retirement can reduce some of the pressure on pensions, which may only be needed to top up a lower income level, rather than immediately replacing earnings.

Should you delay?

Things to check:

• Before deciding to delay retirement, check whether your pension scheme will impose any charges or restrictions for changing your retirement date. Also, ensure you will not lose any valuable income guarantees, such as a guaranteed annuity rate (GAR), by delaying retirement.

• When you get closer to retirement, review where your pension is invested and ensure you are comfortable with the risk you are taking. You might want to gradually reduce your exposure to shares, for example, and move a greater portion into cash and bonds.

• Bear in mind that the current lifetime allowance (for tax year 2021/22) is £1,073,100. This is the amount you can accumulate in a pension over your lifetime, and breaching the limit could see you incur a hefty tax charge when you start withdrawing income.

In theory, the longer you delay, the higher your potential income. However, there are no guarantees of this, and it will depend on market conditions when you retire. Seeking advice from a financial adviser can ensure you are on track for a comfortable retirement and establish how best to boost your retirement fund to suit your personal circumstances.

The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted
as to accuracy or completeness.

Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change.

Paul Cannons

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