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Retirement Decisions During Times of Economic Uncertainty: Back to Work or Staying on?
In some countries, such as the UK and the US, Covid lockdowns and homeworking have had an unexpected and lasting effect dubbed ‘The Great Resignation’, where working-age people choose to permanently leave the workforce. But with the rising cost of living you might be regretting an early retirement decision as higher costs bite into your pensions. On the other hand, if you’re still working, similar concerns may be prompting you to question whether this is really the right time to retire.
Government data shows that, compared with the pre-Covid period, the UK labour force has shrunk by more than half a million people. Overall, the proportion of all people of working age who are ‘economically inactive’ (not in work and not seeking work) had risen slightly to 21.1% by the end of 2022. But among the 55 to 64 age group, the increase has been much larger, as shown in Figure 1, with a third of that age group now inactive.
Compared with the pre-Covid period, at its peak in mid-2022, an additional 386,000 people aged 50 to 64 had quit working, though this has since fallen back to 318,000 as some have chosen to return.
If you’re among those who have voluntarily left the working world, your decision might have been spurred on by ongoing health concerns, wanting a less frenetic way of life away from the daily grind of commuting and punishing workloads or maybe it was something else. But early retirement is not all a bed of roses - with rising food, energy and other bills, you may be having second thoughts and thinking about going back to work.
Returning to work
Now is a good time to be seeking work, as there are widespread labour shortages. This makes it harder for the authorities to fight inflation and get the economy growing, so the government is keen to encourage early retirees back into the workforce.
Government measures to do this might include expanding its current midlife MOT scheme to the already retired with a view to getting you back into at least part-time working.
Nevertheless, a stumbling block may be employers. According to one survey, only two-fifths of managers would welcome an influx of older workers. Although age discrimination in the workplace is illegal, it can be difficult to prove if you’ve been turned down for a job because of your age.
Going back to traditional employment isn’t your only option. Another option might be starting your own business, for example, building on a hobby you’re good at or capitalizing on your former work skills on a consultancy basis. Be aware though that working for yourself can be time-consuming and stressful. Before you take the leap, take stock of what you want from the business and what resources and skills you have. Even if you won’t need to seek external finance, it’s still a good idea to draw up a business plan so that you are clear about what you are getting into and your chances of success.
It’s not just the already retired who have some challenging decisions to make. If you’re over 50 and still in work, you might be feeling that the shocks of the past few years, especially the cost-of-living crisis, have thrown your plans to retire into disarray. Can you afford to retire after all?
It’s important to take stock of what pensions you’ll be able to draw on and the extent to which they might protect you against inflation, both now and as your retirement progresses.
The UK state pension is currently payable from age 66, but you can put off claiming it, in which case you get a slightly higher pension when it does start. The rate of increase is 1% a week extra for every nine weeks you delay starting your pension (which amounts to 5.8% for a full year). The table shows some examples of how much extra you could get.
Length of deferral
Total pension given up*
Weekly pension once it starts*
Table 1: Jonquil Lowe’s calculations for deferring the full state pension based on £185.15 a week in 2022/23
*Gross amounts before deduction of any tax and before taking into account annual state pension increases.
If you’ve already started your state pension, you are allowed to stop drawing it to earn extra, but you can only do this once. You might want to consider this if returning to work means you don’t currently need your state pension after all. (Be aware that, if you reached state pension age before 6 April 2016, the extra you can earn is more generous than the rules described here).
If you do defer your state pension, ignoring tax you’d have to survive more than 17 years to recoup as much in extra pension as you give up during the deferral period. But, if you’re still working and, say, paying tax at the higher rate now but expect to pay only the basic-rate tax in retirement, it would take only 12 years to break even.
Protection against inflation
In broad terms, you can expect your state pension to increase each year in line with inflation. Currently, it increases each year according to a ‘triple lock’ which means it goes up annually by the higher of price inflation, earnings inflation or 2.5%.
It’s unlikely that the triple lock will continue beyond the end of this Parliament. The alternative, written into legislation, is that the state pension increases each year in line with earnings inflation. Although earnings increases are currently lagging behind price inflation, that’s unusual. So, you can more or less bank on your state pension retaining its buying power throughout your retirement.
You might be due a pension from a scheme run by your current or a previous employer. Some of these schemes (called ‘defined benefit’ schemes) promise you a pension that is a proportion of your pay. Typically, these pensions are increased each year in line with price inflation but only to a maximum level, such as 5% a year. This means your income is only partially protected when prices are rising at a faster rate, as they are at present ( 10.1% in January 2023 excluding housing costs).
You may also have other pensions where you’ve built up a pot of savings and it’s now up to you how you use that pot to provide yourself with a retirement income. One option is to buy a lifetime annuity – that’s a financial product where you pay a lump sum and in return get an income payable for the rest of your life. It’s up to you whether you choose a level income that will inevitably lose buying power as prices rise or an income that has built-in annual increases to partially or fully protect you against inflation.
The income you can get from an annuity is closely related to interest rates, which have been rising as the Bank of England battles inflation. This means that annuities (which have been unpopular for many years) are currently offering relatively attractive levels of income. For example, based on the best rates published by Moneyfacts, in January 2022, a lump sum of £100,000 could have bought you an annuity income of £2,800 a year; by January 2023, this had jumped to an income of £4,130 a year – an almost 50% increase in the space of just a year.
Starting to draw some of your pension income now might make it feasible for you to ‘phase’ your retirement by staying in work but cutting your hours. This could be in your current job, but, while there is a legal right to request a reduction in your hours, your employer does not have to agree if there are valid business reasons for turning you down. With some jobs, reducing your hours may be directly linked to your entitlement to start drawing part of a pension linked to that job.
Having it all!
The tight labour market, government incentives and opportunities to flex your work and pensions all open up the possibility of entering a new life stage. You may be able to dovetail work you enjoy but on a part-time basis with time for other aspects of life too, such as family and friends, keeping fit and developing new interests. In the UK, there is no statutory retirement age, so you could continue like that for as long as you and your employer are happy and you’re fit and able to do so.