How downshifting career in your 50s could boost your pension by £89,000
2nd November 2022 11:07
by Alice Guy from interactive investor
Alice Guy explores why changing career could boost your pension wealth by allowing you to carry on working for longer.
There’s no getting away from it, career-changers often come in for some stick and need to develop a tough skin. Those taking the leap are often branded as “dropping out” or “quitting” their profession. It’s hardly a positive write-up!
But with more of us working for longer, changing career could become increasingly common. The average Briton currently has six jobs in their lifetime and what suited us in our early 20s may bore us to tears in our 40s, 50s, or even 60s.
Most of us are familiar with the Sunday night blues, but it’s a whole different level of pain if you’re stuck in a job you no longer enjoy. The average Briton clocks up 34 hours and 26 minutes of work a week, adding up to a total of 1,795 hours a year and 84,365 hours over a lifetime.
Older workers escaping the workplace
So, what’s the average age of retirement? Well, despite the state pension age creeping up to 66, the average Briton still retires at around 64, leaving them with a couple of years to find other income before the state pension kicks in. It’s likely that many recent retirees had been planning to retire at 65 for a long time and it could take a while before the increase in state pension age starts to impact people’s retirement decisions.
But like many statistics, figures for the average retirement age hide a more complex picture, with some retiring much earlier than 66 and some retiring later.
interactive investor's 2022 Great British Retirement survey showed that 56-to-65-year-olds are leaving the full-time workforce in significant numbers, with only one in three in that age bracket working full time. Out of those reducing their hours, 21% did so due to ill health and 13% because of caring responsibilities. Caring has a particularly high impact on women: 18% of women have reduced their hours to care for others, compared with 7% of men.
With so many older workers struggling with their health, it’s worth considering an income protection policy if you’re still fit and healthy. And if you face an earlier retirement than planned, then it’s important to check what working-age benefits may be available. You may be eligible for Universal Credit or other working-age benefits.
But despite many of us retiring early, there is also a trend for more older workers. Recent Office for National Statistics figures reveal arecord increase in the number of people aged over 65 employed in the UK, with an extra 173,000 joining the workforce between April and June this year. Interestingly, the increase was driven by a rise in part-time work and the average number of hours worked actually fell.
Could changing career be the solution?
For those not yet ready for retirement, switching to a new role with less stress or fewer hours could give your career a new lease of life and even ease the transition into later-life part time working.
And it turns out that behind closed doors many of us are considering making a career change. Recent research by Microsoft shows that one in four over-45s is considering a career or role change: those working in sales, media and marketing (58%), manufacturing and utilities (54%) and finance (53%) are most likely to be thinking about a switch.
Financial impact of a career change
Thinking about your finances is a big part of any career decision. Taking a salary hit or switching to part-time hours could mean you need to tighten your belt and have less money to contribute to your pension.
But changing career could also, perhaps surprisingly, give your pension a boost. That’s because switching to a job you love, or at least don’t hate, could help you carry on working for longer.
Work for longer to preserve pension wealth
The problem is that, when it comes to wealth planning, we often focus on how much we can add to our pension. But we sometimes forget the opposite side of the pension equation: how much and for how long we need to dip into our finite pension pot.
If changing to a part-time, more junior, or less stressful role allows you to carry on working for longer, you’ll need to withdraw less from your pension and might be able to leave it intact until you reach state pension age, currently 66 (soon rising to 67 and with more rises on the cards in future, for younger workers).
In contrast, if staying in a more stressful job leaves you feeling burned out and wanting to retire earlier, you might need to draw a significant chunk from your pension pot before reaching state pension age.
What difference does working longer make?
In fact, our calculations show that you could actually boost your pension by an impressive £89,000 by downshifting your job and retiring a few years later.
Switching job at 55-years-old and reducing your earnings from £50,000 to £35,000, but working right up until 66 instead of 62, will mean you earn £39,673 less up to retirement. But if a less-stressful job allows you to carry on working until state pension age, your pension pot will still continue to grow to £314,017 by the time you reach 66-years-old (see table below). You could still end up with £89,000 more in your pension and £56,000 more money overall than someone else who stayed in a higher-paid job but retired at 62 years old.
The extra pension growth is due to continuing pension contributions and investment growth until you reach 66 years old and, crucially, no pension withdrawals.
In contrast, someone who retired at 62 would need to withdraw £21,000 per year from their pension pot, between the ages of 62 and 66, to give them enough income to enjoy a moderate retirement. This would leave them with a smaller pension pot of £224,763 by the time they hit 66 years old.
Even taking their lower earnings into account, the career changer could still end up with more wealth overall.
How changing career could boost your wealth | Net earnings between 55 to 66 years old | Net pension withdrawals between 55 to 66 years old | Total net income (including pension income) | Pension wealth at 66 | Earnings plus pension wealth |
Employee 1: switching to £35,000 job and retiring at 66 | 290,301 | 0 | 290,301 | 314,017 | 604,318 |
Employee 2: staying in £50,000 job but retiring at 62 | 250,628 | 72,788 | 323,416 | 224,763 | 548,179 |
Difference | 39,673 | -72,788 | -33,115 | 89,254 | 56,139 |
Assumptions:
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Get back your career mojo
For many older career-changers, financial calculations are only part of the picture. They are also hoping to find a job they love and get a Monday morning spring in their step.
Lucy Kellaway, a former FT journalist who changed career to teaching at 58, comments that, “I have loved starting again; the feeling of getting constantly better at what I’m doing; the new friends I’ve made who are all half my age – and all the freshness that comes from that.”
Kellaway had toyed with teaching several years earlier but felt very old next to all the young recruits. Going back to journalism, it took many more years before she was brave enough to make the switch. She has no regrets about not changing sooner but comments that, “what I do wish is that someone had told me long ago that my working life would probably last at least 50 years, and I would need to have multiple careers”.
Find a job that suits your priorities
Changing career or job could also help you find a job that suits your priorities: priorities that are often very different for older workers. The ability to work from home or fit our jobs around caring responsibilities often becomes more important as we reach middle age.
- How I built a small side hustle into a new career in my 40s
- How does your pension compare with your neighbour?
In fact, recent research from the ONS found that, among over 50s considering a return to the workplace, 70% said having more flexibility was top of the list when it came to tempting them back. And a study by the British Medical Association found that 37% of doctors said that negotiating new working arrangements was important for them to be able to work for longer.
For many older workers, finding a job they prefer with flexible working arrangements could help them ease the transition into retirement. It could also make a big difference to their retirement plans, allowing them to carry on working and building their pension wealth for longer.
Ultimately, finding the right job could make it easier for many of us to achieve a comfortable and prosperous retirement in the future.
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