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More and more people are staying in work beyond State Pension age or are returning to work in some form once they have retired. Express.co.uk has compiled a guide to explain how returning to work will be impacted by taxation.
Can you work beyond State Pension age?
Yes, you are entitled to work for as long as you like.
Currently, State Pension age is 65 for men and women, with this rising to 66 later this year.
The number of people who work beyond state pension age is around 1.5 million, but many experts believe this number may increase the next few years following the coronavirus pandemic which has greatly impacted many people’s financial security.
People choose to continue working or returning to work after retirement age because they need the money, they enjoy their work or they do not want to stop working abruptly.
The default retirement age in the UK was stopped in 2011, meaning workers are no longer required to stop working if they do not want to.
Some firms can still insist on a cut-off age but they have to be able to justify this objectively.
Jobs which require a high level of physical fitness may fall into this category.
Most employers tend to discuss retirement as part of an annual review and strive to reach an individual agreement with each employee depending on their personal circumstances.
Many people who carry on working for a few extra years switch from full-time to part-time with two-thirds of those working beyond State Pension age choosing to do so in this manner.
Can you draw a pension while still working?
Once you reach State Pension age you can begin receiving your State Pension payments.
The full new State Pension is £175.20 per week, but the actual amount is dependent upon your National Insurance contributions.
State Pension payments will be counted as income and is taxable in the same way as your earnings and any savings income you receive.
State Pension is paid without tax deducted, known as gross income, and any tax due is collected from other sources such as PAYE or a self-assessment tax return.
If you continue working beyond State Pension age you can choose to defer your State Pension until later which will enable you to access increased payments over a shorter period of time.
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In terms of private pensions, it may also be possible for you to draw from your private pension while working.
You will be unable to draw from a scheme and continue paying into it at the same time, however.
Private pensions are also taxable income, normally paid with tax deducted via PAYE.
Deferring a final salary, or defined benefit, pension, is less advantageous financially than deferring the State Pension, because the final salary pension will not compensate the holder for the period when they do not claim it.
Different schemes may handle deferring different depending on their individual terms and conditions.
Your private pension scheme’s rules govern the point at which you stop accruing further pension and schemes apply a pension age at which point you are expected to start claiming.
What are the tax implications on your private pension?
Your private pension contributions are tax-free up to certain limits.
You usually pay tax if savings in your pension pots go above: the tax relief amount, the annual allowance or the Lifetime Allowance.
You can get tax relief on private pension contributions worth up to 100 percent of your annual earnings.
This means you can get automatic tax relief if your:
Employer takes workplace pension contributions out of your pay before deducting Income Tax
Rate of Income Tax is 20 percent – your pension provider will claim it as tax relief and add it to your pension pot (‘relief at source’).
You can find out more about tax relief here.
The Annual Allowance is the maximum amount you can save in your pension pots in a tax year before paying tax.
This year the annual allowance is set at £40,000.
Your annual allowance applies to all of your private pensions, if you have more than one.
The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.
For the tax year 2020/2021 it is £1,073,100 and it will likely to increase in line with inflation at the end of the current tax year.
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