How to avoid the financial hazards of unretiring
TRICIA PHILLIPS HAS ADVICE FOR LOOKING AHEAD WHEN IT COMES TO YOUR CASH
half-a-million workers over the age of 50 left their jobs during the pandemic, and are classified in official statistics as “economically inactive”, despite being of working age.
And yet over the past few months, fuelled by the cost-of-living crisis, many of these older workers have reconsidered their financial position and are returning to paid work.
It has become a political issue too, with both the Tory and Labour parties discussing policies to encourage and support older workers back into working life, such as preferential tax rates and a midlife MoT to help them assess their finances.
Employers are also trying to entice them back as they try to plug the skills shortage gap, for example by offering flexible working options and dedicated support services.
Returning to work is a big decision to make because “unretiring” can also have serious consequences for your finances, explains Andrew Tully from pensions giant Canada Life.
He said: “Unwinding retirement plans can have significant financial implications and they will need to be considered carefully alongside the more mundane aspect of getting out to work each day again. There can be hidden financial consequences for doing so, alongside the more obvious boost to your household income.
“There are also the less obvious – but equally important – factors, such as the benefit to your mental and physical health.”
So, what does it all mean for your personal finances, and what do you need to watch out for?
Here we explain what “unretiring” really means for your money, with some tips to help you plan for a return to work.
But first, we need to talk about income tax. Because basically there will be tax implications to earning again, and it could be a bit messy if you are already claiming your state pension and if you have accessed any other private pensions.
There are three income-tax bands. You can earn £12,570 (your personal allowance) in any one tax year without paying any income tax. For earnings over £12,570, you start paying tax at a rate of 20%. For people who earn over £50,271, you will start paying tax at 40% – called the higher rate. From April, anyone earning more than £125,140 will pay tax at a rate of 45%.
Anyone earning between £100,000 and £125,140 loses their personal allowance, so the effective tax rate on that band of earnings goes up to 60%.
These tax thresholds are frozen until 2028, which will result in more people paying higher rates of tax in future. But how does all this tax talk effect your other income, for example, your pensions?
STATE PENSION
If you’ve reached state pension age and have started claiming, then this income will count towards your income for the year for tax purposes. Experts predict, in the not-toodistant future, due to the triple-lock annual uprating and frozen thresholds, many more people will start paying tax simply because of the income from their state pension.
If you don’t need the income, you can choose to defer claiming your state pension, but keep in mind it might affect other benefits you may be entitled to.
If you choose to defer by a year, for example, you’ll add around 5.8% to the amount you are due to receive in the future.
Tully’s tip: “It isn’t well-known but there is some flexibility in the state pension system – you can choose to stop receiving your state pension once it is in payment, but you can only do this once. You can restart at any point, and will receive a higher weekly pension depending on the length of the period you’ve stopped for.”
PRIVATE PENSIONS
If you’ve started to generate an income from private or personal pensions, you may have more flexibility – but it does depend on the type of pension you have.
Defined benefit or final-salary type pensions are far more restrictive than other types. You won’t be able to turn off any income being received. Most public-sector penAROUND sions are of this type. For other types of workplace or personal pensions, where you’ve transferred the money into a “drawdown” or SIPPtype arrangement, you have total control on when and how you generate an income.
Tully’s tip: “Using drawdown gives you complete control and flexibility, and you can choose when and how much income to take, which helps manage any tax liability.”
ANNUITIES
You may have chosen an annuity as part of your retirement plans, where, in exchange for your pension, an insurance company will guarantee to pay you a lifetime income.
These products are far less flexible than drawdown arrangements and the income will continue whether you want it or not.
Tully’s tip: “Annuities can, however, be purchased within drawdown arrangements which means you can have the flexibility to stop and start the income you receive as your needs change through retirement.”
MONEY PURCHASE ANNUAL ALLOWANCE
If you’ve flexibly accessed your pension, meaning you’ve withdrawn £1 more than your 25% tax-free cash allowance through contracts like drawdown, then you’ll be restricted in the amount you and your employer can pay into your pension.
This is currently £4,000 a year, and any contributions over that won’t attract tax relief.
The £4,000 may sound a lot but when you start a new job and you are under state pension age you’ll
automatically re-join the workplace pension scheme, and any employer contribution, alongside your savings and tax relief, will count towards that annual limit.
Tully’s tip: “This will catch people out, especially if you’re hoping to replenish savings by taking advantage of employer pension schemes. So care needs to be taken especially if you earn £50,000 and over.”
SAVINGS
If you choose to defer by a year, for example, you’ll add around 5.8% to the amount you are due to receive in the future.
Interest from ISAs is tax-free. HMRC also allows a certain amount of interest from other savings products to be earned tax-free through your Personal Savings Allowance.
If you are a basic-rate taxpayer then you can earn £1,000 in interest each year without paying tax.
For higher-rate taxpayers that falls to £500. If you earn over £125,140 from April then it falls away to zero.
Tully’s tip: “ISAs are a great way of harbouring savings from the tax man, as are some of the products available from National Savings Investments, the Government savings bank.”
Working into later life can provide you with a real sense of purpose and a welcome routine. And as employers balance the need to retain and attract older people, many are adapting by being much more flexible in their approach to standard workplace practices.
The cost-of-living crisis might be driving the “great unretirement”, with financial concerns the number-one priority, but people who do take the next step will hopefully see the positive impact on their mental health and wellbeing too.