How late retirement affects your pension

Now we can work past 65, and there are ways to maximise funds and savings.

From Wednesday, employers will no longer be able to force their staff to retire from their jobs once they reach the age of 65. The ending of the default retirement age has been cheered by charities and campaigners as a way to combat ageism in the workplace which leaves nearly half of men and two-thirds of women in their early sixties out of full-time employment.

But the ending of the default retirement age could have substantial implications for pensions and savings.

"Everyone knows that a lot of people are going to be working longer, but this may be a different type of working," says Alasdair Buchanan, a director at the pensions provider Royal London. "For example, they may continue part-time for several years. This means that pension plans have to reflect the fact that there may no longer be this cliff edge of retirement for people."

The age when people collect their personal or workplace pension is likely to change. Mr Buchanan adds: "Instead of great numbers of people collecting their pension at 65, what we will see is a lot more flexibility over the age a pension is exchanged for an annuity, or the percentage of a pension pot being cashed in."

In particular, pension-income drawdown may become more popular. Drawdown is when an individual chooses to keep their pension invested but opts to receive an income from the fund. So, for example, someone with a £100,000 pension pot could choose to take a proportion – up to £25,000 – as a tax-free lump sum, but leave the rest of the cash invested paying out a regular income.

"Most personal pensions are flexible and can be accessed anytime from age 55, and can draw part of your pension and leave the rest invested," says Laith Khalaf, a pensions analyst at Hargreaves Lansdown.

What's more, the Government is currently reforming pension saving with the objective of making it even more flexible.

However, some workplace schemes are less suited to the brave new world of flexible retirement ages. "Finalsalary schemes are very much geared towards people collecting the whole of their pension at a particular age – usually 65," says Mr Khalaf. "As for some other workplace schemes, they may be structured so that, when a specific age is reached, then share investments are sold and the money moved into safer but lower-performing bonds and cash. If people are taking a more flexible approach to retirement, then these schemes may not be as appropriate."

Another potential pitfall could be tax. "If you find that you work on beyond 65 but take a pension, be wary of your tax position. You don't want the combination of pension income and salary to push you into the 40 per cent higher-rate tax bracket," says Ian Naismith, the head of pensions at Scottish Widows.

If tax is a concern, Mr Naismith says, leaving a pension invested maybe the best option: "Choosing to defer converting your pension into an annuity – an income for life – will give it a chance to grow further. The rule of thumb is the longer you let a pension run, the more it should be worth, and the older you are the higher the annuity you should get."

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