Advising the unretired

  • Explain how to advise people who delay retirement or return to work after retirement
  • Identify the reasons for late/deferred retirement
  • Describe a benefit of the shift to DC pensions

While she has calculated that she can afford to live on the £25,000 pension (when combined with the state pension she will get at age 66), she is not ready to fully retire and would like to work three days a week initially.

Claire’s choice is to defer drawing the pension and try to live solely on her new salary of £30,000, or to take the £25,000 pension income in addition to the £30,000 salary.

However, the latter route will tip her into the higher-rate tax bracket. Assuming the current tax thresholds, she will pay £946 of unnecessary tax in the first year, on income she does not even need, and the situation will only worsen if she does not defer her state pension next year.

The other issue with the latter approach is that any tax-free lump sum will need to be paid when the pension income commences. If there is no immediate need for this capital, it could exacerbate any inheritance tax liability, since the unspent cash will now form part of Claire’s estate.

While 16.7m public sector workers and 10.7m private sector workers still have some entitlement to a DB pension, only 10 per cent of private sector schemes remain open to new members. 

One 'silver lining' of this inexorable shift to defined contribution pensions, of course, is that more of our decision-making can be based on personal objectives rather than scheme rules, given the inherently more flexible nature of many DC schemes.

That said, the demise of DB pensions is likely to be forcing some people to retire later, given that most DC pensions are far less generous.

According to data from the Office for National Statistics, 47.2 per cent of DB scheme members enjoy an employer contribution of  more than 20 per cent each year. Only 3.2 per cent of their DC scheme 'cousins' enjoy the same degree of generosity. 

Key advice areas

As with most aspects of financial planning, it remains vital to understand clients’ motivations.  Advice will be very different for someone continuing to work because they love their job than for someone delaying retirement because they feel financially unprepared. 

Bear in mind that even if people initially defer retirement on their own terms, illness or redundancy could mean plans have to change rapidly.

Advice to people fearing that they cannot afford to retire will likely start with a detailed analysis of the current position, followed by recommendations to plug any gaps.

On the face of it, late retirement should be easier to plan for than early retirement. Clients will have more time to save and, in turn, those savings will have more time to benefit from investment growth. Advisers will also have more time to get the structures just right.