Since April 2011 employees cannot be forced to retire from their job meaning you could still be working and receiving a pension.
Working and receiving a pension doesn’t reduce the amount of pension you are entitled to but it can require a bit more tax planning, as some forms of pension benefit will add to your overall income and be taxed at a higher rate.
Don’t pay any unnecessary tax if you don’t need to. Make sure you understand your position and the options open to you.
What happens when you are working and receiving a pension
Whilst there is no age at which your employer can force you to retire there are a couple of ages to be aware of in terms of when you can collect your pension.
Your government State Pension will be available from your State Pension Age which for most people will now be around age 66/67. You can check your State Pension Age here.
For your private and workplace pensions you can actually access them from age 55 although be aware that the minimum pension age is changing to age 57 from April 2028.
If you plan to keep working past the point at which you are able to take your pensions you have a couple of options:
1. Do nothing and defer taking your pension until a later date. Depending on the type of pension this will likely increase the income available to you when you do eventually take it or means the pension is invested for longer.
2. Take the full pensions available to you and continue working. Pension ‘income’ is taxed as ‘earned income’ and therefore your pension provider usually taxes your income via Pay As You Earn (PAYE). If your pension income together with your employed earnings resulted in you remaining a basic rate tax payer then the pension income would be taxed at 20%. If your total earnings resulted in you becoming a higher rate tax payer then your pension income would be taxed at 40% and so on.
3. Reduce your working hours and take some of your pensions. Perhaps the extra income you are now entitled to from pensions can offset the reduced earnings from your employer if you were to wind down your work and ease into retirement.
If you do plan to defer taking your pension income you need to let your pension provider know as you don’t want the pension income to all of a sudden start paying out. Usually for pensions like the State Pension and defined benefit pensions, once the income pay-out starts, it can’t be stopped.
Another thing to be aware of with defined benefit pensions is that sometimes the scheme rules may indicate that you do in fact have to retire and stop working before the pension can be claimed. This is particularly relevant if you decide to take the pension early.
Also if you do claim a defined benefit pension before the scheme’s normal retirement age your pension income will be reduced as the scheme would be paying you for longer than planned.
Tax planning when working and receiving a pension
For some people, being able to give up work or at least reduce their hours is a massive benefit of reaching pension age.
For others, they may not plan to give up work at all but having the ability to have an extra income source from their pension means they can do more and have a better quality of life.
The ability to be flexible with your pension withdrawals will depend on the type of pension you have.
The State Pension and defined benefit pensions are not very flexible. The only option you have with these pensions is either to take the pension income or defer it to a later date. Once you start you can’t stop, chop or change it.
For defined contribution pensions you have much more choice. By using a pension provider that offers flexi-access drawdown it means you could:
- Take only the tax free lump sum from your pension and leave the rest invested.
- Take some income out but then stop and leave the rest for a later date.
- Take a regular income and also withdraw lump sums as and when you want to.
The beauty of this approach is that you can also be clever with your tax planning.
For example, if you were quite keen to at least reduce hours at work you could drop a day and offset the loss of income with just enough withdrawal from your flexible pension. This could keep you in a tax neutral position.
If you are currently a higher rate tax payer and can’t or don’t want to give up working you could just withdraw from the tax free element of your pension. Most modern defined contribution pensions allow you to take 25% of the total pot tax free but you don’t need to take it all out in one go. You could take small chunks of your tax free cash over time.
Even if your defined contribution or defined benefit pension provider does not offer flexi-access drawdown and you don’t wish to transfer your pensions to a provider that does, you could take your pension income and re-invest it into a new pension.
You may pay tax on the withdrawal but if you are still working you could re-claim it back by re-investing into a pension that is invested, and could build you a more flexible pot in the future or something that you can leave behind.
It’s important to seek advice here though and not fall foul of pension recycling rules.
Something to also be aware of with defined contribution and defined benefit pensions is the pension Lifetime Allowance.
If you are close to this limit this could also influence your decision in terms of whether to take your pension now or not. Especially if deferring the pension means you face extra taxes in the future compared to now.
The retirement phase of life is changing. It’s no longer a case of hitting a certain age and then stopping work completely. We are seeing clients phase their retirement, finish work and take up a different job, retire and then start work again after a number of years. The possibilities are endless and made possible by much more flexible pension options.
If you want to understand your position and options available to you please contact us for a no-obligation free 15-minute call.
Risk warning:
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.
