Returning to work after retiring: How it affects your pension and taxes

A surge of seniors who retired during the pandemic are returning to work out of financial necessity, new research shows.

Money is the main motive cited by 50-65 year olds looking for a job again as household bills soar and the recession threatens.

But whether you’ve retired due to family circumstances, lost your job, or quit of your own accord, reversing that decision isn’t always easy.

We look at recent retirement trends and collect retirement and tax tips from financial experts for those returning to work later in life.

Why are people ‘not retired’?

Official employment data for the year to August-October showed that people in their 50s and early 60s — who made up 60 percent of those who became economically inactive during the pandemic — are now returning to work.

“Inactivity is down this quarter – driven by this age group,” said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, of labor market statistics released last week.

“The big retirement is coming as waves of those who have taken early retirement are pouring back into the workplace: the reality of living on a lower pension in a time of rising prices is proving too difficult.”

She adds: ‘It’s unlikely that most of them will plop down on the couch and decide that a life of leisure isn’t for them. Instead, there is every chance that the terrible reality has set in.

“They’ve figured out what they can afford to live on for the rest of their lives, and with prices rising all around them, they need to get back to work.”

A deeper dive into employment trends among older workers by the Office for National Statistics looked at their reasons for leaving work in recent years, and what is now driving some back to work.

About two-thirds of those aged 50 to 65 said money was a major motive for returning to work, with those in the 50 to 54 year old cohort likely giving this reason.

“As double-digit inflation climbs and the cost-of-living crisis continues to bite, we are seeing a growing number of people rethink retirement,” said Andrew Tully, technical director at Canada Life.

‘People are now not only looking for work after their state pension age, but in some cases we are seeing a retirement boomerang, with people considering whether to return to the labor market due to increasing financial pressures.

Looking ahead, the older workforce will be critical to the recovery of the UK economy as it will help alleviate severe labor shortages.

“However, it is also a warning that people’s finances are under severe strain.”

Back to work at a later age? What you need to know

1. Automatic Enrollment

When you take a new job, your employer will sign you up for its retirement plan, provided you qualify under the auto-enrollment rules and don’t decide to opt out.

“If you’re under state pension age and earn more than £10,000, your new employer should automatically enroll you into their pension scheme,” explains Canada Life’s Andrew Tully.

‘If you are above the state pension age, you will not automatically be registered, but you will be given the opportunity to join.’

2. Tax trap

Your decision to get back into retirement and start saving again can be complicated if you’ve already started withdrawing from an old retirement fund.

When you start tapping into a defined contribution pension pot for any amount above your 25 per cent tax-free lump sum payment, you can set aside just £4,000 a year and you will still automatically qualify for valuable tax relief from then on.

This new and fixed limit is known in industry jargon as the ‘money purchase annual fee’.

“If you want to continue building your pension when you return to work, make sure you’ve activated the MPAA as it can have a huge effect on how much you can contribute,” said Helen Morrissey, senior pensions and pensions analyst at Hargreaves Lansdown.

‘Usually someone can contribute up to £40,000 a year to their pension and still benefit from tax relief, but if you can use your pension flexibly while you were not working this drops to £4,000 a year.

‘If you contribute more to your pension than this, HMRC will bill you for the extra tax relief you have applied for.’

Tully warns that taking £1 more than your 25 per cent tax-free cash counts as ‘flexible access’ to your defined contribution pension, which on top of limiting future contributions means you lose the ability to carry over any unused allowances from the previous three tax years

“The £4,000 MPAA includes both your contribution and that of your employer,” he notes.

3. state pension

“If you can afford it, you can take a break from claiming your state pension while you work,” says Morrissey.

‘This gives you an increased AOW if you decide to stop working anyway.

‘You can only stop taking your state pension once and you have to Contact DWP to let them know the date from which you want to stop claiming. This cannot be a date in the past or more than four weeks in the future.’

Tully points out that stopping your state pension once it’s paid can help with tax control when you return to work, and you can choose to restart your state pension at any time.

And if you have not yet reached the state pension age, you can also choose to postpone payment at that time.

This is Money’s retirement columnist, Steve Webb, provides more information on how to stop and resume your state pension here, and about deferring your state pension here.

4. Private retirement income

If you’re retiring to take a job, consider how much income you’re currently drawing from your existing pensions, suggests Morrissey.

‘If you can afford to take less income while working or no longer receive income from your company pension, this can give your pension more time to grow.

“Many people automatically access their pension as soon as they can, but if you don’t have to take it, you can leave it. Even taking less income can be helpful to boost your pot.”

Tully says, “If you need to withdraw money, you may want to consider the income you are withdrawing, and possibly lower it, especially if total income between paycheck and retirement puts you in a higher tax bracket.

“Think about the income that supports the lifestyle you want. This can be from salary, state pension, own pension or other savings such as Isas.

“Calculating how long you could live and how sustainable your desired income level is is a complex task, so consider seeking professional advice.”

5. Annuities

“A paid annuity or income from a defined benefit cannot normally be stopped or paused once it has been paid,” Tully warns.

However, if you have an annuity written in a Sipp withdrawal package, the income you receive may be reduced or stopped, with the balance remaining invested in the withdrawal until you wish to withdraw it at a later date. That can help to pay less tax.’

6. Trace old pensions

Changing jobs, auto-enrolling with every move, and people’s tendency to lose information and fail to update contact information schedules all cause many to lose track of their old retirement.

Lost pensions have risen 75 per cent to 2.8 million over the past four years, and they are now worth a total of 37 per cent more at £26.6 billion – or £9,500 on average – according to industry data.

‘We work for different employers during our working lives and chances are you’ve lost track of a pension you had with them,’ says Morrissey.

‘This could have a huge impact on your financial prospects when you retire, so if you think you’ve lost track of a pension, it’s worth contacting the government. Pension Investigation Service.

‘If you know the name of your employer or pension provider, this service can give you their contact details.’