Thinking of “unretiring”? Here are 4 factors to consider

Senior businessman at work

When you retired, you might have thought you’d left the workplace behind for good. But perhaps the possibility of “unretiring” has crossed your mind?

If you’re missing the social engagement and mental stimulation of working or you’re keen to boost your savings, coming out of retirement might feel like an appealing option.

If so, you’re not alone. The latest Office for National Statistics data shows that the number of over-65s re-entering the workforce between April and June 2022 hit a record high of 1.5 million, an increase of 173,000 on the previous quarter.

Read on to learn more about why you might want to consider joining this “great unretirement” and discover four factors to consider before doing so.

Unretiring could improve your finances and your mental health

Returning to work could provide a valuable opportunity to increase your pension savings and the retirement income you receive. It may also provide welcome social interaction and mental stimulation.

Research published by Professional Adviser has revealed that 67% of people with a physical or mental health condition or illness, unretired to boost their income, but 46% gave “social company” as their primary reason, while 42% said they had returned to work to improve their mental health.

Whatever your reasons for potentially returning to work, there are some important factors you might want to consider before making a decision.

4 factors to consider before unretiring

1. The removal of the Lifetime Allowance could enable you to grow your pension pot further

The Lifetime Allowance (LTA) limited the total amount you could build up in pension benefits without incurring an additional tax charge. However, the LTA tax charge was removed on 6 April 2023, and it will be completely abolished from 6 April 2024.

So, if you stopped making contributions to your pension because you were nearing the LTA – which was £1,073,100 before it was removed – you might welcome the opportunity to return to work and top up your pension from earnings.

You’ll still only be able to make tax-efficient contributions within your Annual Allowance, but this was increased from £40,000 to £60,000 on 6 April 2023. Your Annual Allowance may be lower if your income exceeds certain thresholds, or you have already flexibly accessed your pension – more on this below.

2. The amount you could tax-efficiently save into your pensions annually might fall

You may want to return to work to supplement your pension income or to continue growing your pot by making contributions based on earnings.

However, if you’ve already started drawing flexibly from your pension, you might have triggered the Money Purchase Annual Allowance (MPAA). This can reduce the amount you can contribute to your pension each year without an additional tax charge.

While the MPAA increased from £4,000 to £10,000 on 6 April 2023 – to encourage people to return to work – this allowance is still significantly less than the Annual Allowance.

3. You could benefit from deferring your workplace or State Pension

If you return to work and start earning an income again, you might choose to stop or defer drawing on your pensions until you need them.

This could mean a higher income when you do access your pensions as your funds may have continued growing and there are likely to be fewer years your savings need to support.

However, your options could be limited by the type of pension you have. You may be able to stop or adjust your withdrawals if you have a flexible or “drawdown” income, but you probably won’t be allowed to do so if you have an annuity.

You might also choose to defer your State Pension if you don’t need it when you reach State Pension Age. If you want to delay receiving payments, you don’t need to do anything as it will automatically defer until you claim it.

The benefit of deferring your State Pension is that it could result in higher weekly payments or a lump sum when you choose to claim it.

The amount of extra State Pension you could receive depends on when you reach State Pension Age. For example, if you reach State Pension Age after 6 April 2016, your State Pension will increase by the equivalent of 1% for every nine weeks you defer (provided you defer for at least nine weeks).

4. You could protect more of your wealth from Inheritance Tax

Pensions usually fall outside an estate for Inheritance Tax purposes, so they can provide a tax-efficient way of passing on your wealth.

And, by returning to work, you could grow your pension fund further, allowing you to leave a larger savings pot for your loved ones.

Your beneficiaries may also be able to receive tax-free withdrawals if you die before the age of 75. Otherwise, they might be liable to pay Income Tax at their marginal rate on any pension they inherit.

It’s important to note that if you want to pass on your pension, you’ll need to complete an “expression of wishes form”. This will allow you to nominate beneficiaries to receive your pension benefits.

If you’re unsure of the best way forward when it comes to unretiring, speaking with a financial planner could be beneficial.

They can help you understand the tax implications of returning to work and how unretiring could affect your long-term financial plans.

To find out more, please get in touch. Email or call us on 01454 416653.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

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 performance.

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.

Workplace pensions are regulated by The Pension Regulator.

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