More retirees are planning to work in some way after they retire. While this flexibility can boost your income and help you strike a work-life balance that suits you, it can lead to some tax implications that you need to consider.
Here’s Some Stats
According to a report from abrdn (formerly called Aberdeen but now they have a silly name!), just a third of people retiring in 2022 plan to give up work completely while two-thirds will continue to work. Flexible retirement is a growing trend, in 2020 just a third of retirees planned to continue working.
While having the extra income is a key reason, it’s not the only one. In fact, 32% said they want something to keep them busy.
That could be because creating a sustainable income that will last throughout retirement can be tricky to plan for (even if you have Marco on board!). There are so many variables including life expectancy, potential investment returns and, more recently, inflation. So, it’s not surprising that only a quarter of 2022 retirees are confident that they’ve saved enough.
A lot of retirees also don’t consider how inflation will affect their cost of living over their retirement and they could find their spending power dwindles. Inflation can mean an income that provided a comfortable lifestyle at the start of retirement doesn’t stretch far enough in your later years unless it rises at the same pace.
Despite this, 27% of retirees said they didn’t know how to mitigate the effect of inflation on their retirement income. Financial planning (that’s what I do) can help but often people will start the next amazing chapter of their lives less than certain about whether they can afford it.
Just 25% of retirees that want to work are aware of the potential tax implications, and it could mean they face a larger bill than they expect.
When asked how they’ll work in retirement, 24% of those retiring this year plan to work part-time in their current job or a new position. 15% will continue to work in their own business and 12% want to use retirement to become entrepreneurs.
So, while more retirees plan to continue working, many are exploring different options that will help them build the lifestyle they want.
There are 3 important questions to consider if you’ll work in retirement (there are certainly others but I’ll focus on these for now).
One of the reasons tax can become more complex if you want a flexible retirement is that your income may come from multiple sources.
These 3 questions can help you understand how your decisions will affect how much tax you pay, and what you can do to reduce your tax bill.
1. Will You Access Your Pension While You Work?
If you’re earning an income from working, will you still need to access your pension?
If you have a defined contribution (DC) pension, you can access it flexibly from the age of 55, rising to 57 in 2028. This can help you secure the income you need even if your income from work changes.
Your pension may be subject to income tax, so it’s important to understand how withdrawals will affect your overall tax liability. If your total income exceeds tax thresholds, you could find you pay a higher rate of income tax than you expect.
If you don’t need your pension to supplement your income, leaving it where it is can make sense. Money held in a pension is typically invested and can grow very tax-efficiently so leaving it invested until you need it can help your savings go further.
2. Will You Continue To Pay Into Your Pension?
An advantage of continuing to work is that you may still be able to pay into a pension which can boost your financial security later in life.
If you’re an employee under the state pension age, depending on how much you earn, your employer may well automatically enrol you into a pension, and contribute on your behalf. Even if you’re not automatically enrolled, you can still add to a pension and benefit from tax relief.
One thing to be aware of is that if you access your pension to take an income, the amount you can tax-efficiently add to your pension each tax year may fall and, if you unwittingly exceed this limit, you could face an additional tax charge unexpectedly.
3. Will You Claim The State Pension?
If you plan to work past the state pension age, you should consider if you’ll still claim the state pension.
The state pension may be liable for Income Tax if your entire income exceeds your income tax personal allowance, and it could push you into a higher tax bracket. As a result, if you don’t need the income, it can make sense to defer your state pension for tax reasons.
If you do decide to defer your state pension, you’ll get a higher amount when you claim it. Your state pension payments would increase by 1% for every nine weeks you defer, which is just under 5.8% if you defer for a year. That’s not bad!
To Conclude…
Understanding where you are and the tax implications of how you’re planning on taking an income is important to do BEFORE you take action. It can be a bit complicated but nothing you can’t get your head around with a bit of support and common-sense advice!
I hope you found this useful and speak to you soon…