Should you consider taking a mini-retirement?

Contrary to the view of a certain ex-footballer and pundit, the term “mini-retirement” generally refers to an extended sabbatical or series of career breaks that provides an alternative to a definitive start of retirement.

With early retirement impossible for most people a phased process is increasingly being seen as a practical alternative to the traditional abrupt end to work. It won’t necessarily cost the earth, and it makes it possible to enjoy the ‘golden age’ of retirement while still relatively young and in good health.

An affordable alternative to early retirement?

Pensions and retirement have become significantly more flexible over the years, which has allowed the mini-retirement to be a realistic goal for many. Lots of people don’t want to retire fully, but instead relish a period of reflection and recharge before carrying on in some capacity. Alternatively, the opportunity to travel or indulge in favourite pastimes while still active could be an attraction.

A mini-retirement can also make for a gentler transition into retirement and is more financially viable than early retirement, especially if the time out involves learning a new skill to use when re-entering the workforce. Often 60 is the preferred age to retire, or even sooner, but this simply isn’t a realistic prospect for most as you need enough money to last your entire retirement. With life expectancies rising over the longer term, a mini-retirement can be more achievable.

There are financial pitfalls, though. While everyone is keen to enjoy their retirement as much as possible, it’s important to plan carefully and lay the right foundations for the stage of life you're in.

Can I really do this? How to plan a ‘mini-retirement'

A mini-retirement needs to be carefully planned to ensure it doesn’t leave you short in later years. You may need to plan for enough income to last you and your partner well into your nineties.

Taking a full break means you will stop earning for a period. Not only does this mean you need to fund your lifestyle during your time off, but you also won’t be able to add to savings or pensions during this time. This will reduce the provision for your eventual full retirement. It’s therefore important to have a realistic expenditure and timeframe before returning to work.

It’s also important to know that you have gainful employment to return to. In some industries an extended period off work might mean ‘deskilling’ to some extent, or not being fully up to date with the latest procedures or rules. You don’t want a mini retirement to turn into an enforced career change. It is also possible your health could deteriorate and affects your earnings capacity, which is especially the case for manual jobs.

You therefore need to balance your ambitions with a financial plan to support your mini-retirement and your full retirement goals. Reconciling your future plans with the resources at your disposal will give you peace of mind.

How ISAs and pensions can help

With the state pension is not paid until 66, and with that age set to rise, it probably means you’ll need to be providing for your mini-retirement with your own saving and investing. Fortunately, retirement is something of a moveable feast if you have planned ahead. Utilising various investment products such as tax-efficient ISAs and personal pensions such as SIPPs over the years can give you lots of flexibility.

With pensions you do have some restrictions. You can only take income or lump sums from age 55, which is due to rise to 57, but you can start and then stop withdrawals, which is useful for a mini retirement. Pensions are highly tax efficient because of the tax relief you receive when making contributions. For instance, a £1,000 contribution to a pension can only cost £600 to a higher rate taxpayer. However, when you come to take money out there is tax to pay beyond, generally, the first 25% of the pot.

For ISAs there is no up-front income tax relief, but like pensions all investment returns are tax free. In addition, all withdrawals are tax free, which can mean that mixing and matching withdrawals from ISAs and pensions according to overall levels of income and circumstances can make sense from a tax perspective. If well invested they could even provide a passive income stream to help see you through your mini-retirement phase, ideally without depleting your capital.

You can put in up to £20,000 each year into ISAs, the valuable aspect being that you can withdraw anytime. This means it’s possible to use them to fund a mini retirement in your early fifties (or earlier!) something that isn’t possible with pensions.

Clearly, the more ambitious your plans are, the more they will cost and the more planning and investing you will need to do to get there, but with the flexibility of ISAs and personal pensions there is plenty of scope to plot the retirement course you want.

Getting professional retirement advice

Modelling your financial position and potential cash flows from difference sources and assets can help you decide whether a mini retirement is a viable option. Speak to us about planning your retirement and ensure you have enough money for the lifestyle you want.