Due to a change in circumstances, more people are now considering working beyond their retirement years. The approach they are looking to take is a flexible one whereby they work to supplement their income while also finding the right work-life balance. However, if you choose this option, there are some tax implications that have to be considered.
Around 33% of people retiring in 2022 will bring their working life to an end but the rest have plans to continue to work. This is a trend that is growing with many planning to work part-time in their current role with others looking to work on a freelance basis while some will continue to operate their own business and others will look to become an entrepreneur. So, with more people looking to continue working, many are now looking to find a lifestyle that works for them.
A Trend Driven by Financial Concerns
Many are choosing flexible retirement as a way of creating an income but this is not the only reason as some want to keep themselves occupied. However, working through your retirement does require some careful consideration such as life expectancy as well as returns from investments.
This has highlighted the fact that only a quarter of retirees have saved enough to retire.
The rising inflation could cause a problem for those who don’t consider it as it could mean that their retirement funds are no longer able to support their lifestyle as the years go by. Furthermore, many are not sure how to reduce the impact of inflation and so, financial planning can help to gain a greater understanding of how your pension and assets can help to generate an income during retirement.
With this in mind, only 25% of retirees are aware of potential tax implications that could affect them and this could mean that they have larger bills to pay.
What Will You Need to Consider When Working in Retirement?
Will you need to access your pension while you are working?
If you are earning money while retired, do you think you will need to access your pension? If you have a defined contribution pension then you can access it once you reach the age of 55 although this will increase to 57 in 2028. This might enable you to have the income you need even if your work circumstances change.
There is a chance that your pension will be subject to income tax therefore, you should understand how withdrawals affect your tax liability. Furthermore, you might find that you earn beyond certain thresholds and that could see you paying more tax. If you decide to leave your pension where it is, this could work better for you as it will be able to grow and be free of Capital Gains Tax.
Will you carry on paying into your pension?
If you continue to work, you might be able to continue adding to your pension which will help to make you more financially secure later in life. If you are below the state pension age and working while earning more than £10,000, your employer must ensure you’re enrolled into a pension and contribute as well. However, if you do decide to access your pension, you have to be aware of the Money Purchase Annual Allowance which means that the amount you can add to your pension tax-efficiently could drop to £4,000.
Will you claim State Pension?
If you will be working beyond the age that you can claim state pension, you should think about whether you will claim it. It might be liable to Income Tax if your income goes beyond the personal allowance and that could result in you paying a higher rate of tax. So, if you don’t need it, it makes sense to not claim your State Pension. Should you choose to hold claiming your State Pension you will then receive more when you claim it. So, for every nine weeks you avoid claiming it, it will rise by 1% which will increase it by 5.8% for one year.
Therefore, it makes sense to consider all outcomes should you think about claiming your pension while working as it might not be the right decision based on your circumstances.
Want to learn more about YOUR PENSION AND TAX OPTIONS DURING RETIREMENT?
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Capital at risk. Headway are not tax advisers, and that advice should be sought from a taxation specialist.