Plan to work past state pension age? The key facts
There are currently 1.2 million people aged 65+ who continue to work, more than double the rate seen around the turn of the twentieth century, according to an independent review of the state pension age.
While some continue to work to boost their pension income, to take advantage of flexible hours, or because they’re not ready to stop working, for others, more worryingly, it’s because they simply can’t afford to give up their current rate of pay.
Whatever reason you have to continue to work past the state pension age, here are the key implications you need to consider.
The new state pension or flat rate state pension, which took effect from 6 April 2016, is currently £155.65 per week, but not everyone will get this amount as it depends on your National Insurance Contributions (NI).
If you have gaps in your NI record which means you may not get the full amount, you may be able to plug the gap, providing you do this ahead of reaching state pension age. See YourMoney.com’s How to plug your state pension shortfall for more information.
But if you continue to work and have an alternative income, you could decide to defer claiming. This means in time, you accrue higher weekly payments.
Here are the deferral rates:
- One year: you’ll receive £164.64 per week (a 5.8% increase).
- Two years: you’ll receive £173.64 per week (an 11.6% increase).
- Three years: you’ll receive £182.63 per week (a 17.3% increase).
- Four years: you’ll receive £191.62 per week (a 23.1% increase).
- Five years: you’ll receive £200.62 per week (a 28.9% increase).
Andrew Pennie, head of pathways at Intelligent Pensions, said deferring may make more sense for higher rate tax payers.
“The benefits of deferring a state pension may be more rewarding for higher rate tax payers than for basic rate tax payers who may need to rely solely on the state pension for their income.
“If you’re a higher rate tax payer, it may make much more sense to defer if you continue to work as taking more income means you’ll be paying more tax.”
With a private pension, the actual decision to use drawdown or buy an annuity doesn’t need to be made until retirement. However in reality deciding what to do should be made earlier, especially if you have a defined contribution (DC) pension.
This is because DC schemes have an investment strategy to a target date, or an ‘investor flight path’.
Martin Tilley, director of technical services at Dentons Pension Management, explained that if for example an individual is planning to annuitise their pension savings at a given age, say 65, they would want to take steps to de-risk their investment as they approach that date.
“An individual’s fund invested in equities for example might have a value of £100,000 one month before their 65th birthday but due to a stock market correction, equities could fall dramatically just before they are due to buy the annuity. With no time to recover loses the individual’s retirement income could be reduced which would be for the remainder of their life.”
He added that if an annuity is the likely outcome, a gradual move towards less volatile assets as the individual approaches retirement “might be appropriate”.
With drawdown, only 25% of the fund is being crystallised and the remaining fund continues to be invested to provide income so a different, longer-term strategy may be key.
For those with a defined benefit (DB) scheme, Pennie said the “decision is made for you”, so there’s nothing to do as it’s not about an investment strategy, rather it’s about length of time and earnings.
You’ll also need to be aware of the Money Purchase Annual Allowance (MPAA). Those aged 55+ taking advantage of pension freedoms by releasing or drawing down some or all of their tax-free cash sum and who benefit from an income from the remaining drawdown pot, have a restricted annual allowance of £10,000 per year. Essentially it restricts ‘double pension relief’ on money going in to and out of a pension.
Tax and National Insurance contributions
Tax on pensions is identical for DB or DC schemes and you pay it on everything, whether the state or private pension, or your earnings.
National Insurance (NI) is different as you don’t pay it on your pension or annuity and you stop paying it on earned income once you go past the state pension age.
If you’re 60+ and taking a private pension but you’re still earning, you will continue to pay NI until you hit the state pension age.
For the self-employed, you’re still liable for NI even after you reach your state pension age because of the self-assessment tax year end, whereas for someone who’s employed, they stop paying on the day they reach state pension age.
Pennie said: “If you’ve worked 40 years, it’s a big change to stop. A lot of people like to wind down slowly. But if your income isn’t sufficient, this is more concerning as it would be nice if people had the choice, rather than continuing to work because of a distinct lack of pension savings.
“You have to plan and get an understanding of what pension you’re entitled to and how it’s sustainable when you stop work.”