The cost-of-living crisis has had many well-reported consequences over the past few years, but one which has rather slipped under the radar is the effect on those who are retiring, or who have recently done so.
Recent research from Legal and General showed that although only 3% of retirees say they intend to go back to work, 2.8 million people have done just that – 11% of the UK’s population of over 50s.
Finance is a major factor in this, but not the only one. The survey found that 37% of those returning to work after retirement said they were doing so because they needed a higher income to meet living expenses; however, 62% said it was because they wanted to stay mentally active.
Given relatively high inflation rates in recent years, this shouldn’t be a surprise. Many who retired five or more years ago will have seen their income eroded by annual inflation of as much as 11.1%.
With more retirees returning to the workplace, it is worth considering the financial and tax implications of doing so, especially for those who have already started to draw down from their pension pot.
Perhaps the most important thing to consider is that if you have started to take the taxable element of your pension, your ability to top it back up is limited, with the annual allowance falling from £60,000 to just £10,000. This is not the case if you have only taken the tax-free element (currently 25% of your pot up to a cap of £268,275).
If you are under 75, your employer will have to re-enrol you in a pension scheme under auto-enrolment. Any contributions you do make on your return to work will also allow you to re-build up the 25% tax free allowance. But it is important not to breach that £10,000 annual limit (including any employer’s contribution), otherwise you could face a nasty tax bill.
How old you are when you return to work has an impact on how the taxman will treat you. If you are over the state pension age, you will not pay employee’s national insurance (although your employer will have to pay the employer’s contribution; whatever age you are, you will not have to pay NI on any pension income).
Those old enough to qualify for the state pension could find that their overall income pushes them into a higher tax bracket. If this is the case, it is worth considering deferring taking your state pension; for those reaching state pension age after 2016, you will receive an extra 1% for every nine weeks you defer taking it; for those who reached state pension age before 2016, the state pension rises by 1% for every five weeks you defer taking it.
So if you are approaching retirement or have recently retired, and you think you might decide to re-enter the workplace, what are the considerations?
Don’t access the taxable element of your pension if you don’t need to, as this will enable you (and your employer) to make full pension contributions of up to £60,000 a year.
If your employed income will push you towards a tax threshold, consider deferring taking your state pension until you are no longer working.
Have a plan: personal cashflow modelling can help you understand how to take income and how to minimise your tax liabilities.
Returning to work after retirement can offer financial rewards, but it is important to approach it with a clear strategy. By carefully managing when and how you access your pension, understanding the impact of reinstating earnings for your tax position, and using tools like cashflow modelling, you can prosper within this next chapter. With the right planning, re-joining the workforce can be a win-win for both your finances and your personal fulfilment.