What you need to know about your pension if you continue to work
As you approach traditional retirement age, you may decide that it’s not the right time for you to give up work yet. It’s part of a wider trend and there are any number of reasons you may decide to continue working. However, there are some key things to understand about your pension first.
Phased retirement is becoming increasingly popular. It’s an approach that blends the free time and flexibility of retirement with working. If phased retirement is something you’re considering, you’re not alone. In fact, research from Aegon suggested that half of UK workers over the age of 50 preferred an alternative to ‘cliff edge’ retirement. Rather than giving up work on a set date, a more gradual approach is now desired by thousands of those approaching the milestone.
Whether you want to continue employment to build up your retirement provisions further or because you enjoy it, your pension should be kept in mind, including these five areas:
1. You don’t have to access your pension
Pensions are now usually accessible from the age of 55. However, you’re under no obligation to make withdrawals at any point. If a continued income from work means your pension savings aren’t needed, you can choose to leave the money invested, hopefully continuing to grow.
Even when you do decide to leave work, your pension can still remain untouched. For inheritance purposes, this can be a prudent decision. Money left within your pension can typically be passed on tax efficiently to your loved ones. If your estate may be liable for Inheritance Tax, it can help to minimise the potential bill.
2. You can withdraw from your pension while working
Pension Freedoms introduced in 2015 aimed to give those approaching and in retirement more flexibility. If you choose, you can continue to work as well as accessing your pension. It can provide a way to supplement your income, allowing you to achieve lifestyle goals or boost the income from a part-time position.
From the age of 55, you can access your pension, no matter your work situation. This could mean taking a lump sum, often only the first 25% is tax-free, purchasing an Annuity, or using a Flexi-Access Drawdown product to make adjustable withdrawals.
If this is an attractive option for you there are a few things to keep in mind; limits on future pension contributions, potential tax liability, and ensuring sustainable withdrawals.
3. You can still contribute to your retirement savings, but may be limited
While you’re working, you may want to continue building up your pension. It’s often an excellent way to boost your savings, as employee contributions typically also benefit from employer contributions and tax relief.
The amount you can place into your pension tax-free will depend on whether you choose to access it. The standard Annual Allowance means you can place £40,000 into your pension each year. Although, if you’re a high earner, this may be reduced by as much as £30,000, to £10,000, due to the Tapered Allowance.
However, once you access your pension, the Money Purchase Annual Allowance (MPAA) will apply instead. This limits the amount you can place in your pension to £4,000 each year permanently. It’s reportedly already affected almost one million people over the age of 55.
4. Pension withdrawals are subject to Income Tax
Much like an income from employment, the money you receive from a pension will usually be subject to Income Tax. If you’re continuing to work alongside making withdrawals this can unexpectedly push you into the next tax bracket and increase the amount paid.
As a result, carefully choosing how you’ll access your pension and when you’ll make withdrawals throughout the year is important. Figures from the Office for Budget Responsibility highlight how crucial efficient tax planning is. It’s projected that for the tax year 2018/19 HM Treasury will receive an extra £400 million in tax from pension withdrawals, taking it to a total of £1.3 billion.
For the tax year 2019/20, the Personal Allowance is £12,500, while the higher-rate threshold has increased to £50,000.
5. Your investment strategy may change as you approach retirement age
Most pension funds will automatically adjust how your savings are invested as you approach retirement age. Typically, your investments will be transferred to a portfolio that is considered less risky. This is done in a bid to limit the amount of volatility your pension is exposed to before you’re expected to begin making withdrawals.
If you plan to access your pension on the expected date, this may be the right strategy for you. However, if you plan to leave your pension invested for an extended period of time, selecting investments that have a higher risk profile may suit your goals more closely. It’s important to look at the investment time frame, capacity for loss, and your overall attitude to risk should you decide to change how your pension is invested.
If you have any questions about your retirement plans, please contact us. We’re here to help you get the most out of pensions and other retirement provisions, whichever approach to giving up work you decide to take.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Workplace Pensions are regulated by The Pensions Regulator.
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