For some, it follows redundancy or burnout. For others, children leaving home, caring responsibilities easing or retirement coming into view creates a natural window. For many, it may simply be a case of deciding that some of their retirement dreams are worth enjoying sooner rather than later.
The trend also reflects a wider rethink about later life. Government research found that 55% of people aged 40 to 75 who had not yet retired said they would definitely or probably consider a Midlife MOT, designed to help people take stock of their finances, skills and wellbeing.
Maike Currie, VP Personal Finance at PensionBee, comments: “For years, the words ‘gap year’ conjured up images of backpacks, hostels and young people heading off to see the world before starting their careers. But increasingly, it’s older generations who are taking time out.
“And rightly so - why should gap years be wasted on the young? After decades spent working, raising families, paying mortgages and saving for retirement, it’s understandable that more people want to enjoy some of that freedom while they’re fit and healthy enough to make the most of it.”
However taking a gap year at 58 is financially very different from taking one at 18. Time away from work can mean lost salary, missed workplace pension contributions and potentially a gap in your National Insurance (NI) record. For those considering dipping into their pension to pay for the adventure, there can be longer-term tax consequences.
Five money checks before taking a golden gap year.
Check your State Pension record
Time away from work could leave a gap in your National Insurance (NI) record. You normally need at least 10 qualifying years to receive any new State Pension, while those whose NI record started after April 2016 normally need 35 qualifying years for the full amount. Check your State Pension forecast before you go. Missing years can sometimes be filled through NI credits or voluntary contributions.
2. Check what happens to your workplace pension
If you take unpaid leave or a sabbatical, your own and your employer’s pension contributions may stop, depending on your employer and scheme rules. That means the cost of a year away could include not just lost salary, but lost pension contributions and potential investment growth too. Check your employer’s policy before you go.
3. Keep your pension ticking over
Even with little or no relevant UK earnings, you can generally receive tax relief on pension contributions of up to £3,600 gross a year, provided you're eligible. In a relief-at-source pension, that would typically mean paying £2,880 yourself, with £720 in basic-rate tax relief added. Even small contributions can help keep your retirement savings on track.
4. Think carefully before dipping into your pension
If you’re 55 or over, you may be tempted to use your pension to fund the adventure. But flexibly taking taxable income from a defined contribution pension can trigger the Money Purchase Annual Allowance (MPAA). Once triggered, the MPAA limits future contributions to £10,000 a year before an annual allowance tax charge may apply. The standard annual allowance is currently £60,000, although it can already be lower for some higher earners. This matters particularly if you plan to return to work and resume pension saving.
5. Budget for coming home too
Don’t spend everything on the adventure. Keep an emergency fund separate from your travel budget, allow for ongoing costs such as your mortgage/ rent and insurance, and leave enough to cover the period after you return, particularly if you don’t have a job waiting for you.
Currie concludes: “A golden gap year is really about buying yourself something incredibly valuable: time. But you don't want the trip of a lifetime to leave a lasting hole in your retirement.
“Think of it as planning for two journeys at once. There’s the adventure you want to have now, and the much longer retirement still ahead of you. Check your State Pension, understand what happens to your workplace pension and think very carefully before dipping into retirement savings. With some planning, taking time out now doesn't have to mean sacrificing financial security later.”
|
