Pensions - Articles - Bridging the income gap when retiring early


Four fifths of over-50s (42%) have reduced their working hours or plan to as they approach retirement. 85% of over 50’s expect to use their State Pension to fund part of their retirement. One in five (19%) of those who have or plan to purchase a fixed term annuity do so to help plug the income gap

 Three quarters (75%) of over-50s say the ability to use their pension savings to bridge any income gap between reducing their working hours or fully retiring and the State Pension kicking in is important to them, according to new research from Standard Life, part of Phoenix Group.
 
 This comes as research shows almost half of over-50’s (42%) have either reduced their working hours or plan to do so as they approach retirement. While this allows for people to take a more flexible approach to their retirement, it creates challenges when it comes to managing on a potentially lower income. Four fifths (85%) of over 50’s expect to use their State Pension to fund part of their retirement, and with people currently have to wait until the age of 66 before they can start taking it, this means many will be relying on their savings ahead of this kicking in.
 
 The most popular options for over 50’s seeking to navigate any income gap include taking a lump sum withdrawal from their pension (33% of over 50’s), drawing down their pension as an income source (16% of over 50’s), and using cash savings (34% of over 50’s). However, a fifth over-50s (19%) have or plan to purchase a fixed term annuity to address their income needs before their state pension begins, recognising how this type of solution provides a way of accessing some or all of your pension savings to provide you with a guaranteed income for a fixed term, with the option of doing something else at the end of that time.
 
 Pete Cowell, Head of Annuities at Standard Life commented: "The concept of a ‘hard stop’ at retirement is becoming increasingly less commonplace, in favour of a more gradual approach, with people phasing into retirement and continuing to work, while drawing on some of their pension to supplement their income. Every penny of your pension savings counts when thinking about retirement, and especially in this scenario. Where people are reducing their working hours or retiring early, the issue around how they combat a lower income before their State Pension kicks in will be a key consideration, particularly where people still have a mortgage to pay off.
 
 “While cash and drawdown options have their merits, it’s particularly encouraging to see fixed term annuities being used or considered. These types of solutions can provide a useful way for individuals to secure a guaranteed income during the crucial years before their state pension begins – helping to plug any income gap during this period - whilst also allowing for flexibility to change plans once the fixed term period comes to an end. It’s important to consider all available options when deciding what to do with your retirement income. More often than not, having a combination of retirement income solutions can often best meet peoples’ needs, and having an element of guaranteed income can be an important part of this mix.”
  

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