What to consider if you plan to unretire
If you are a retiree and are planning on returning to the workplace to boost your pension income, you could face a higher tax bill. What will it cost you to unretire?
Financial and social pressures are pushing many older people to ‘unretire’ and return to the workplace to boost their retirement income.
Despite benefiting from rising state pension payments, retirees are still being hit with high bills as inflation remains above target.
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A quarter (24%) said they feel lonely or socially disconnected from others when not working, the findings highlight that financial pressures are a key driver behind this ‘unretirement’ trend.
Many also feel underprepared for retirement. A fifth (20%) say they did not realise how much money they would need in retirement, with a similar proportion wishing they’d had planned their retirement more thoroughly (21%), and one in five (19%) say they had not appreciated how long retirement would last.
The unretirement tax trap
Returning to work can help supplement your income but it could also push up your tax bill.
If you are already taking money out of your retirement savings through an annuity or drawdown or are receiving the state pension, any extra income will boost your earnings and potentially add to your income tax bill if the amount is above the personal tax threshold of currently £12,570.
“Combining salary with pension income could push you into a higher tax bracket, increasing your tax liability," says Ian Futcher, financial planner at Quilter.
"It's sensible to use HMRC’s online tools or consult with a financial planner to understand how returning to work might affect your tax situation."
Pension planning
If you are returning to work with the intention of putting more into your pension, there are some factors to consider.
HMRC will continue to pay tax relief on pension contributions up to age 75 so it may still be worth putting money into retirement savings if you return to work before then.
For those who have purchased an annuity and are considering returning to work, Gary Hemming, a financial advisor at ABC Finance, says you can start a new pension plan to benefit from further tax relief on their contributions.
But if you have already entered a drawdown agreement, then your annual pension contribution allowance actually drops.
Rather than being able to contribute up to £60,000 into a pension, you would fall under the money purchase annual allowance rules and can only put in up to £10,000 per year.
“If you are over state pension age, you may need to ask your employer to auto-enrol you,” says Tom Selby, director of public policy at AJ Bell.
“As you get older there may be other costs you need to plan for, such as paying for long-term care.
“This can be quite uncertain but you should consider the possibility when deciding how much you need to save.”
How to avoid having to unretire
You can’t predict what the economic environment will be when you retire but you can plan by putting as much into your pension as possible
If you want to stop working, you need to be confident you have sufficient income to pay for your lifestyle throughout retirement, which could be a period of 30 years or more,” Selby adds.
“You need to be clear about your living costs and, for those taking an income through drawdown, have a sensible pension withdrawal strategy that won’t run the risk of you exhausting your fund early.”
Many retirees follow the 4% rule for how much they should withdraw from their pension each year, although some experts suggest this should be closer to 6% in the current environment.
“Some may be able to withdraw from their pension more safely if they retire later, enjoy string investment growth or have other income sources, such as a defined benefit pension,” adds Selby.
Futcher advises maximising your contributions to benefit from tax relief and employer contributions as early as possible, ensuring a more comfortable retirement.
It is also important to create an emergency fund to act as a financial buffer for unexpected costs and to prevent you having to dip into your pension too early.
“Another sensible approach is considering phased retirement, which involves reducing your working hours gradually, allowing for a smoother financial and mental transition to full retirement” he adds.
“Finally, a diversified investment strategy can complement your pension income and provide additional financial security during retirement.”Mike Ambery, retirement savings director at Standard Life, said many people are opting for a phased retirement where you scale back on work to ensure you make time to enjoy your golden years.
There are steps you can take to ensure you can fund your lifestyle without too much extra work.
He said: “Simple steps can make a real difference, whether that’s before or during retirement – from regularly checking in on your pension savings and thinking about how you’ll use them to generate an income, to reviewing how much you’re taking and whether it’s likely to last for the years ahead.
“It’s also important to check when you’re due to retire, as your planned retirement date and your state pension age don’t always align, and to make sure you’ve planned for any gap between the two. Taking time to consider the kind of lifestyle you want, exploring phased or flexible retirement options, and seeking guidance early can help people make more informed decisions. Planning ahead means people are better placed to manage their money with confidence and achieve greater financial security over the long term.”
