Considering a retirement U-turn? Here are three important things to know
Since the pandemic, there has been a spike in retirees returning to work.
Indeed, a report from Royal London in December 2022 found that in the three months to October 2022, 76,000 fewer people were “economically inactive”, meaning they are unable to or choosing not to work.
In the age bracket between 50 and 64, those seen as economically inactive dropped by an even steeper 84,000 – suggesting some recent retirees have decided to go back to work.
If you have kept pace with the news in the last 12 months, these figures are likely unsurprising to you. With inflation reaching 10.5% in the year to December 2022, and market volatility causing some investors to worry about their long-term wealth, it is no wonder retirees are choosing to head back into employment.
If you retired in recent years and are considering a move back into work, remember: there is no “right” decision, just the one that works for you and your family.
Whatever your circumstances, there are significant financial and emotional aspects of leaving retirement you should be aware of before you perform a U-turn. Here are three key things to consider.
1. If you’ve already flexibly accessed your pension, you may have triggered the Money Purchase Annual Allowance
If you have started to access your pension flexibly, you have likely triggered a little-known tax trap called the “Money Purchase Annual Allowance (MPAA)”.
As of the 2022/23 tax year, the MPAA reduces your Annual Allowance – the amount you can contribute into your pension tax-efficiently – from £40,000 a year (or your total earnings, whichever is lower) to just £4,000.
So, if you are taking your pension and begin earning an income again, the amount you can tax-efficiently pay back into your pension pot will drop steeply. Many retirees don’t realise this – according to a 2021 Just Group report, 260,000 pensioners were caught by the MPAA in 2020 alone.
Fortunately, although your pension contributions may be limited, you can still invest your earnings elsewhere, such as in ISAs, if you reverse your retirement and head back to work.
Discussing your pension contribution and other investment options with your Kellands financial planner could be beneficial at this stage. For example, if you have yet to begin flexibly accessing your pension, it could pay to delay this if you are planning to make pension contributions when you return to work.
2. Earning while drawing your pension could push you into a higher tax bracket
When you’re taking a pension and earning an income simultaneously, it’s vital that you pay attention to how this could affect your tax circumstances.
The way you’re taxed depends on how you are drawing your pension. Here are three different ways to draw from your pot, and how they might be affected by additional income you make.
Flexi-access
If you’re flexibly accessing your pension, you can design your drawdown method to ensure you pay as little tax as possible on the sums you take.
For instance, taking less than 25% of your pension is usually a tax-free transaction – but above this amount, you will likely be taxed at your marginal rate.
If you subsequently begin earning an income again, your total “earnings” – the amount you take from your pension above the tax-efficient lump sum, combined with your salary – might push you into the next Income Tax bracket.
Annuity
Buying an annuity guarantees you a fixed retirement income for life – something that, in these unpredictable times, might bring you the peace of mind you need.
Annuities are treated like any other earnings, meaning depending on the amount you receive, you could pay Income Tax on it. Combine this with earnings from employment, and you may find yourself paying a much higher rate of Income Tax than you thought.
A single lump sum
Generally, taking your pension as a single lump sum is not a tax-efficient way to earn a later-life income. With 75% of your pot usually subject to Income Tax, you may pay far more tax than necessary if you use this method.
Additionally, if you take your pension all at once and receive income from additional sources, your tax liability will likely increase even higher.
All this to say: taking two forms of income at once can mean you pay much higher tax.
If you’re planning a retirement reversal and don’t wish to get caught up in this “tax trap”, speak to your Kellands financial planner about your concerns.
3. Returning to work could help you afford your lifestyle in the cost of living crisis
Of course, there are undeniable benefits for some individuals who wish to U-turn their retirement and head back into the workforce.
Perhaps you needed a well-deserved break from full-time work, and have now decided it’s not yet time to lay down your tools for good. Or, you wish to help your loved ones thrive in their own lives and know returning to work can help you achieve those goals.
Whatever your reason, there is no shame in starting again. Whether you go back to your old role, or pursue an entirely new career path, if going back to work will suit your needs, we can help.
If you are on the fence about this all-important decision, your Kellands financial planner can offer invaluable guidance. Sit down with us, and we can discuss:
- The tax implications of you returning to work
- Whether you need to work again, or if you have enough to achieve your goals without it
- The emotional implications of working after a brief retirement
- How this move fits in with your long-term plan.
No matter your question or concern, we are here to support your long-term plans, in or out of retirement.
Get in touch
For a discussion about reversing retirement, pensions, or any other financial matter, email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.