With the summer holidays here, thoughts turn to leisure and time to enjoy the outdoors.
What would most of us give for some time away from responsibilities, able to do what we want, when we want to do it?
Although this may be the general workforce’s rose-tinted view of retirement, it might not be necessary to wait until state pension age to achieve this type of lifestyle.
Many of our clients approaching retirement age are considering a partial retirement phase before stopping work. Some are considering part-time work in their current role, others are thinking of new part-time positions until they feel ready to stop altogether.
We are seeing many more younger clients in their 30s and 40s considering alternative working arrangements
This is not a new concept. Partial retirement is an excellent tool within financial planning, allowing clients to reduce their working responsibility while still earning. It seems, for some, a better option than moving straight to full retirement, which can be a scary concept if you have no idea how you plan to use it.
That said, interestingly, we are seeing many more younger clients in their 30s and 40s considering alternative working arrangements which they hope will give them an improved work-life balance.
Many office workers already have a hybrid working environment, spending part of the week in the office and the rest at home. Technological advancements in recent years have meant this has become a normal option for businesses and workers.
Others (perhaps non-office workers) are choosing to work more flexible hours, working longer hours for fewer days to gain a day off in the week. Some have decided to reduce their hours altogether, either temporarily while family or other needs take precedence, or permanently to give them additional free time to achieve personal goals.
Less immediate factors to carefully consider are pension contributions and other benefits from employers
Clients are coming to us with various combinations of these situations to assess viability for their financial futures. There are several things to take into account.
One of the positives of a flexible working arrangement is that you are likely to save money. If you work at home during part of the week, or have arranged to concentrate your working week into fewer days, you will save on your travel costs, spending less on fuel, parking costs, public transport and even vehicle maintenance. An added bonus is that travelling less reduces environmental pollution and contributes to sustainability.
Another big bonus for employees able to compress their working week is reduced childcare costs, saving a significant amount of money over a year.
On the negative side, you may have to spend money creating a home office or converting an existing space into something fit for purpose. You may also have to upgrade your internet connection to be able to work effectively. And, talking from experience, you might have to increase your biscuit budget…
Other less immediate factors to carefully consider, particularly if choosing to work fewer hours, are pension contributions and other benefits from employers. Most benefits are based on gross salary, and if you choose to reduce your hours, and therefore reduce your gross salary, you will also experience a reduction in the value of benefits received.
Even small changes made in a client’s 30s and 40s can have a significant impact on their financial wellbeing when they decide to retire
If salary is reduced, the value of pension contributions made by an employer may also be reduced. It is important to check the long-term impact of this change in circumstances.
Clients may think they can top up their pension with a personal contribution before the end of the tax year, but they should be aware that their annual contributions are limited to the lower of £60,000 (this year) or annual relevant earnings. If salaried income has decreased due to flexible working arrangements, this could have a significant impact on the ability to grow pension savings.
If a client’s entitlement to private healthcare is reduced as a result of a changed working arrangement, they may wish to consider additional private medical insurance. Equally, if the income protection or death in service benefits to which they are currently entitled are reduced, you may wish to source additional life or critical illness cover.
It is important to take all these factors into account when considering moving to a flexible arrangement or when reviewing ongoing situations to make sure clients are still able to achieve their long-term goals.
Advisers are able to map out various financial futures, showing how cashflow will be impacted by any changes made. Even small changes made in a client’s 30s and 40s can have a significant impact on their financial wellbeing when they decide to retire in later life.
Taking time to help clients consider all the options and make sure they are making the right decision, not just for now, but for the future, is time well spent.
Rachel Halton is head of paraplanning at Informed Choice
