Should you ease into retirement with part-time work?

Pensioners have just enjoyed the first state pension payment of the new tax year, and it’s 8.5% higher than they received last year. 

That’s thanks to the triple lock rules, which increase state pension payments by the rate of inflation, wage growth, or 2.5% – whichever measure is highest.

Unfortunately, savers and pensioners don’t enjoy the same protections when it comes to their private pensions. Over the past couple of years, many have seen the purchasing power of their pots eroded thanks to the high rate of inflation. 

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Against this backdrop, some have taken the tough decision to delay the start of their golden years. By staying in work for longer, they hope to increase their chances of a comfortable retirement while reducing the risk of having to “unretire” – an increasingly common phenomenon. 

Recent research from Standard Life, however, points to a more enticing middle ground. Working three days a week between the ages of 66 and 69 could increase the size of your pension pot by around 16%, according to the pension company’s calculations. 

“[I]f you’re able to continue working and not touch your pension for a number of years, the effects of further contributions and compound investment growth can really add up”, explains Dean Butler, managing director for retail direct at Standard Life. 

We share all the details. 

What is the cost of a comfortable retirement?

The cost of retirement has soared in recent years. 

Earlier this year, research from the Pension and Lifetime Savings Association (PLSA) revealed that a single person will need an annual retirement income of £43,100 to enjoy a comfortable standard of living. Meanwhile, a couple will need £59,000. 

This factors in a weekly grocery bill of £130, as well as luxuries like beauty treatments, theatre trips, a subscription to a streaming service, and a two-week European holiday each year, as well as some UK minibreaks.

However, even a basic retirement will cost a single person £14,400 and a couple £22,400 – and this does not include a budget for running a car. 

What’s more, these figures are after tax. And with income tax thresholds still frozen, fiscal drag is conspiring with inflation to reduce your spending power even further.

Interactive Investor points out that, when you take inflation and housing costs into consideration, younger savers will actually need to amass a pension pot of more than £1 million, if they want to enjoy a comfortable retirement. 

With this in mind, many are considering working for longer or even coming out of retirement. But it is important to remember that returning to work after accessing your pension pot could have tax implications, reducing the amount of pension tax relief you are entitled to receive. 

As such, going part-time as you phase into retirement could be a better decision. 

Boosting your pension pot with part-time work

Analysis from Standard Life reveals that an employee who started their career on a £25,000 salary could expect to build a pension pot of around £434,000 by the time they reach retirement age.

This assumes monthly employee contributions of 5% and employer contributions of 3% – the minimum under auto-enrolment rules. It also assumes the employee starts work aged 22 and enjoys 3.5% salary growth each year.

By extending their working life by three years, working three days a week until age 69, this employee could add an additional £71,000 to their pension pot. By doing this for five years, they could add an additional £125,000. 

Not many people will want to work a full decade after hitting retirement age but, if you are willing to work until you are 76, you could increase your pot by £283,000 – and all while taking a salary in the meantime. 

Source: Standard Life. Figures are not reduced to take effect of inflation. Annual Management Charge of 1.00% assumed. The figures are an illustration and are not guaranteed. Earning limits not applied. 

If you want to boost your pension pot even more than this, you could decide to increase the size of your pension contributions. This can be a good idea, if you don’t need quite so much of your salary in the immediate future. Some employers will even match your contributions up to a certain amount. What’s more, any contributions that you make will benefit from tax relief, and potentially investment growth too. 

Deferring your state pension could also be a good idea, if you decide to stay in the workplace a little longer. Recipients of the new state pension can gain an additional 1% for every nine weeks they defer. This amounts to around 5.8% per year. 

Read our analysis on the pros and cons of deferring.

Shifting attitudes towards part-time work

According to a survey from Standard Life, 76% of pensioners stopped working entirely upon retirement. Meanwhile, nearly half of Gen Z respondents said that they plan to phase into part-time work. 

“While their attitudes may change over time, this pattern makes a lot of sense given longer lives and changes in working habits”, Butler explains. 

It also makes sense when you consider the rise in the cost of living. Indeed, 14% of retirees over the age of 55 have had to return to work in recent years due to insufficient funds, and an additional 4% are considering it.

Planning ahead to avoid a tax penalty

If you think you could end up going part-time after reaching retirement age, it is important to plan ahead. Being caught unawares could result in unpleasant tax implications, depending on whether or not you have already accessed your pot.

Unfortunately, those who access their pension pot before returning to work suffer a penalty from the taxman, known as the money purchase annual allowance. This typically kicks in as soon as you start drawing an income from your pension. 

Once the money purchase annual allowance has kicked in, you can only contribute up to £10,000 to your pension each year tax-free (as opposed to the usual £60,000). This means you could miss out on valuable pension contributions from HMRC. 

With this in mind, part-time work should form part of your retirement strategy rather than being a panicked afterthought.