There are nearly 1.5 million people aged 65 and over in employment which is a new record, according to the Office for National Statistics (ONS).

It said the record increase in numbers between April and June 2022 was driven by rises in part-time work (161,000 across employees and self-employment) with this cohort notching up an average of 21.7 hours a week.

By sector, the largest increase in over-65s taking up employment were in education, accommodation and food services, as well as in arts, entertainment and recreation.

‘Reality is biting’

According to Becky O’Connor, head of pensions and savings at Interactive Investor, the figures show the cost-of-living crisis is impacting retirement dreams.

She said: “The record rise in employment among over-65s shows that reality is biting for people who might prefer to be retired, but can’t afford to give up work.

“During the pandemic, when savings were high and people were forced to stay at home, we saw many people bring forward decisions to give up work, because retiring early felt achievable.

“But now that inflation is rampant and stock market returns are volatile, the tables have turned, the retirement numbers don’t quite add up and older people are taking a practical approach and returning to work in their droves.

“The latest ONS data suggests that many are finding part time work opportunities to suit, or earning self-employed income. Over the years, it’s likely that more people will either have to or choose to try and find a balance between working and retiring and ‘flexi-retirements’ become the norm.”

Five key points if you’re working in later life

Kate Smith, head of pensions at Aegon, said: “It’s particularly important that those who want to return to work in their 60s have the opportunity to do so. It will provide an additional boost to their finances alongside the many social benefits from being in a workplace.”

Whether you plan to continue working after state pension age or you’ve previously retired but have now returned to the workforce, here are five essential points to know when it comes to your pay, pension and benefits.

1) The £4,000 Money Purchase Annual allowance

The pension annual allowance is the amount of money you can pay into your pension pot every year where the amount gets tax relief.

It currently stands at £40,000 a year or 100% of your earnings, if lower, for most people. Anything above the threshold is subject to a tax charge.

However, for anyone who has accessed their retirement money, The Money Purchase Annual Allowance (MPAA) kicks in. It is a restricted annual allowance for those aged 55+ who have released or drawn down some or all of their tax-free cash sum and who have benefitted from an income from the remaining drawdown pot. It applies to contributions paid by the worker, an employer or anyone else, Smith explained.

Jon Greer, head of retirement policy at Quilter, said: “If you have accessed your pension savings already, you may be limited in the amount you can contribute into pensions in the future without being subject to an additional tax charge.

“This limit is known as the MPAA and currently stands at £4,000 a year. If this applies to you, your pension provider will have to let you know, but it is worth checking if you are unsure.”

Smith added: “Any contributions paid above this will attract a tax penalty, which is payable by the individual. It’s easier than you might think to breech the £4,000 limit once the employer contribution is included, so individuals should check this isn’t going to hinder them if they are looking to rebuild their pension.

“If the MPAA has been reached, people could consider saving additional contributions into an ISA. This means that people can still save up to £24,000 a year in tax incentivised savings (ie £4,000 into a pension and £20,000 of their own money into an ISA).”

2) National Insurance

For those who work and are of state pension age, there’s no National Insurance to pay on the money you earn. Pensions also aren’t subject to National Insurance.

But Smith warned they will still pay income tax. She said: “It is important you check your State Pension Age as this is currently 66 and due to increase to 67 in 2028 and to 68 by 2039. Just like any other income, the State Pension is taxed. So, if you are still working, and have claimed your State Pension, be careful to avoid crossing an income tax threshold. Paying pension contributions can help you to avoid this.”

3) Delay state pension

You can continue to claim the state pension if you are working, though it is worth remembering you don’t have to take your state pension straight away if you don’t need or want to, according to Greer. He said: “If you would prefer to, you can defer taking it and receive higher weekly payments in the future as a result. For those who reached their state pension age on or after 6 April 2016, the state pension increases by the equivalent of 1% for every nine weeks you defer, working out at just under 5.8% for every 52 weeks.”

As an example, if you get £185.15 a week, by deferring for a year, you’ll get an extra £10.70 a week (just under 5.8% of £185.15).

4) Pension auto-enrolment

While workers can continue to accrue further pension rights if employed, Greer said that for those who have already reached state pension age, “will not be automatically enrolled into your employers’ workplace pension scheme”.

He added: “Provided you earn more than £6,395 a year (22/23 tax year), you have the right to opt in and you will qualify for the minimum level of employer contributions. If you choose to do this, it is worth discussing with your employer what the terms of their contribution will be to ensure you are aware of how much is being saved into your pension and therefore how much you may wish to top it up by.”

5) Impact on benefits

For anyone in receipt of Pension Credit, Greer suggested people first check how the amount of Pension Credit will be affected if their income, capital or other circumstances change.