What to consider if you plan to unretire

Many retirees are returning to the workplace as their pension income fails to keep up with the cost of living, but could end up with a higher tax bill if the 'unretire'?

older worker
(Image credit: Getty Images)

The high cost of living is pushing many older people to ‘unretire’  and return to the workplace to boost their retirement income.

While most people do not save enough for a pension, cost pressures mean the pensions shortfall is significant, so much so, many are ditching retirement plans and going back to work. 

The inflation rate may be falling but household and transport costs remain high while uncertain markets may have hit pension pots, creating a cost of retirement crisis for many.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Despite benefiting from state pension payments rising from 10.1% this year and by 8.5% in April, many retirees will still face high bills for costs such as council tax and broadband and will want to spend money to enjoy their golden years, while perhaps support family members.

It comes as figures from the Pension and Lifetime Savings Association shows a single person needs at least £43,100 per year to fund a ‘comfortable retirement.’

Research by Standard Life has found 14% of retirees aged over-55 have gone back into work as their living costs have increased and their pension is not sufficient to fund retirement. A further 4% are also considering returning to the worplace.

Men were more likely to have unretired, at 16%, compared with 12% of women, the Standard Life survey found.

Two thirds who have unretired said income issues have been the driving force behind this, while a third said they have found their living costs have increased more than they’d expected, meaning they’ve needed to return to work.

Another quarter realised their pension is not providing enough income to live on. 

Meanwhile, three in ten want to earn more money so they can treat themselves more in retirement.

“The economic landscape of the last few years has put sustained pressure on people’s finances, with all ages and stages of life impacted,” says Dean Butler, managing director for retail direct at Standard Life.

“As a result, people are being forced to seek new ways of supplementing their income, be that taking on additional work, delaying retirement plans, and even returning to work having previously retired.”

There are tax and pension implications to consider if you unretire though.

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

“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.”

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.