Should you stay in work?
The pros and cons of staying in employment beyond 66 are finely balanced
Britons are staying in work longer and in larger numbers than ever before. Already, 8% of people over 66 – the age at which you can begin claiming the state pension – are still in employment, according to research from the Centre for Economics and Business Research and Legal & General Retail Retirement, with the figure set to hit 11% by 2030.
In some cases, people are staying in work for longer out of financial necessity, while in others, it is a personal choice. But if you do continue earning an income at an age when you are also entitled to claim pension benefits, it is important to weigh up your options carefully.
With state pensions, while you can begin claiming from age 66 onwards, you don’t have to do so. The alternative is to defer taking the cash in return for a higher payment when you do finally start taking it. You will receive 5.8% more pension for each year that you put off taking the money.
If you don’t need your pension because you can live on your employment earnings, deferring this year’s £179.60 weekly state pension for 12 months, say, would entitle you to claim £190.02 in a year’s time.
Deferral is something of a gamble. You have to live long enough to receive more from your extra payments than the total pension you gave up during the deferral period. In theory, that’s around 17 years – taking people close to the average life expectancy, so it’s a finelyjudged decision.
But the impact of tax might bring that figure down. If you defer taking your pension until you’re earning less and have moved into a lower tax bracket, you will get a boost.
Think carefully about private pensions too. In theory, you can begin drawing down money from private pension savings from the age of 55. But again, leaving the cash where it is for an extended period could boost its value when you do begin taking it.
If you’re a member of a defined-benefit scheme, the longer you keep paying into the plan, the more guaranteed income you can look forward to. In defined-contribution plans, you will be able to leave your savings invested for a longer period, and hopefully they will appreciate. You may also be able to take a more aggressive approach with your investment strategy if you know you don’t need to cash in your savings for an extended period.
A key pitfall
One possibility is a hybrid approach. If your earnings from employment need supplementing, you could claim your state pension, but not begin drawing from private savings – or vice versa.
But watch out for one trap here. If you begin taking an income from your private pension savings – even a very small one – you are likely to come up against the money purchase annual allowance (MPAA). This limits you to making further pension savings of just £4,000 a year.
The MPAA was introduced to stop people drawing pension benefits and then immediately reinvesting them to get a second chunk of tax relief.
But if you’re still paying into a pension through an employer, while taking income from another of your private pensions, this rule can catch you out.
“You get 5.8% more pension for every year you defer”