Phased retirement risks creating income gap until state pension kicks in

Just over two fifths (42 per cent) of workers have reduced their working hours or plan to do so as they approach retirement, according to research from Standard Life.

The research found that more than four-fifths (85 per cent) of over-50s expect to use their state pension to fund part of their retirement, despite being unable to access it until they are 66, which could risk creating a potential income gap.

Standard Life explained that while this approach allows people to take a more flexible approach to their retirement, it creates challenges when managing on a potentially lower income.

As a result, three quarters (75 per cent) of people over 50 said using their pension savings to bridge any income gap between retirement and the state pension kicking in was important to them.

The most popular options for over-50s seeking to navigate any income gap included taking a lump sum withdrawal from their pension (33 per cent of over-50s), drawing down their pension as an income source (16 per cent of over-50s), and using cash savings (34 per cent of over-50s).

However, a fifth of over-50s (19 per cent) had purchased or planned to purchase a fixed-term annuity to address their income needs before their state pension began.

Standard Life’s head of annuities, Pete Cowell, said the findings revealed that a "hard stop" at retirement is becoming "increasingly less commonplace" in favour of a more gradual approach.

"People are 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, 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 flexibility to change plans once the fixed term period ends."

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