Contributing To A Pension After Retirement

Contributing to a pension after retirement is still perfectly possible and in fact could be very prudent in terms of your overall planning. 

Reducing work or stopping work all together is likely to restrict the amounts you can save so it’s important you are aware of the rules. 

Why not continue getting ‘free’ money from the government even when you have retired?!

Why you might want to consider contributing to a pension after retirement 

It may seem odd to think about contributing to a pension after retirement, after all, retirement is the time you should be spending your pension, right?   

Well, yes of course, that is certainly one option. But in the early years of your retirement, you might still be working a bit or not need as much from your pension.  

You might utilise other sources of income first like cash savings, rental income, an inheritance or even other different types of pensions.  

Here are three reasons why you might want to consider contributing to a pension after retirement:  

1. Tax relief. What you pay into a defined contribution pension is topped up by the government via tax relief. For example, if you pay in £8,000 into a pension, the government will top this up by £2,000. That’s a 25% return! Plus if you are a higher rate Income Tax payer you can claim further tax back. Also, if you are still working part time, your employer will likely pay into your pension too! 
2. Tax free growth. Money invested inside a defined contribution pension grows tax free. There is no Income Tax on dividends or interest and no Capital Gains Tax when you sell units or shares inside the pension. The only other investment wrapper that does this is the ISA but you are limited to investing £20,000 per tax year with ISAs.
3. Protection from Inheritance Tax. Pensions are exempt from Inheritance Tax providing the proceeds are distributed within two years of death. So a great Inheritance Tax planning tool. 

What to watch out for when contributing to a pension after retirement 

Pension tax relief is one of the more generous government tax policies and rightly so. It’s a great way to incentivise people to save for their retirement and not be reliant on the state. Money invested into pension funds provides capital to the great companies of the world to ensure we, as a society, continue to evolve.  

But the government are careful with their generosity. They will only give us so much before they take away.  

Here is what to watch out for when contributing to a pension after retirement: 

• Age 75. You can only contribute to a pension up to age 75.  
• Contribution levels. If you are still working in retirement then you can contribute up to 100% of your salary or £40,000 whichever is lower. This sometimes catches people out if you have large amounts of cash savings you want to get into a pension. If you earn less than £40,000 in retirement you will be limited to paying in what you earn only. Even if you are not working at all you can still contribute £2,880 per year and the government will top this up by £720. That’s free money! 
• Already withdrawn from a defined contribution pension. If you have withdrawn income from a flexi-access pension then you will be subject to the Money Purchase Annual Allowance (MPAA) meaning you are limited to contributing either £4,000 or 100% of salary, whichever is lower. You need to be careful if you do still work in retirement as you will likely be auto-enrolled into the company pension scheme and the employer + employee contributions may be higher than the MPAA causing you a tax headache! The MPAA doesn’t apply though if you’ve only taken the tax free cash from your pension or purchased an annuity. 

You should definitely consider contributing to a pension after retirement just be clear on what you are allowed to do and when.  

If you want to find out more about pensions and your retirement options we recently produced a webinar on this exact subject. You can watch the recording below. 

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.