Tax Questions: Planning a Flexible Retirement

Retirement photograph

More people are planning to work after they retire, to boost income, strike a work-life balance, or fulfil a dream, but with it comes tax implications. It’s said one third of people retiring in 2022 plan to give up work completely, the rest will continue to work – flexible retirement is a growing trend. Whether part-time in your current job or new position, in your own business or a plan to use retirement to become an entrepreneur, you are not short of options to facilitate a lifestyle.

While creating an income in retirement is a key reason behind the flexi-retirement trend, it’s not the only one, a common reason – the need to keep busy. Creating a sustainable income that will last your retirement can be difficult to understand. You often need to consider things, from life expectancy to potential investment returns, with many retirees in a position where they are wondering have they’ve saved enough.

Higher levels of inflation are adding complexity. Retirees that don’t consider how inflation will affect their cost of living over their retirement could find that their spending power dwindles. Inflation can mean that an income that afforded a comfortable lifestyle at the start of retirement doesn’t stretch far enough in your later years unless it rises at the same pace. So, how to mitigate the effect of inflation on your retirement income?

Financial planning can help you understand how your pension savings and other assets can help you build an income you can rely on in retirement. It means you can start this chapter of your life with confidence. For some, it may mean they continue to work past their retirement date. Financial planning could also help you make income more tax-efficient if you do plan to continue working in retirement. Just 25% of retirees that want to work are aware of the potential tax implications, and it could mean they face a larger bill than they expect.

One of the reasons taxes can become more complex if you want a flexible retirement is that your income may come from multiple sources and may change depending on your needs. These three questions can help you understand how your decisions will affect how much tax you pay, and what you can do to reduce your tax bill.

If earning an income from working, will you still need to access your pension? If you have a defined contribution pension, you can access it flexibly from age 55, rising to 57 in 2028. This can help you secure the income you need even if your income from work changes.

However, your pension may be subject to Income Tax, so withdrawals may affect your overall tax liability. If your total income exceeds tax thresholds, you could find you pay a higher rate of Income Tax. If you don’t need your pension to supplement income, leaving it where it is, can be the best idea. Money in a pension is typically invested and can grow free from Capital Gains Tax.

An advantage of continuing to work is that you may still be able to pay into a pension, this can boost your financial security later in life. If you’re an employee under the State Pension Age and earning more than £10,000 in the 2022/23 tax year, your employer must automatically enrol you into a pension, and contribute on your behalf. Even if you’re not automatically enrolled, you can still add to a pension and benefit from tax relief. One thing to be aware of is the Money Purchase Annual Allowance (MPAA). If you access your pension to take an income, the amount you can tax-efficiently add to your pension each tax year may fall to just £4,000. If you unwittingly exceed this limit, you could face an additional tax charge unexpectedly.

If you plan to work past the State Pension Age, you should consider if you’ll still claim the State Pension. The State Pension may be liable for Income Tax if your entire income exceeds the Personal Allowance, and it could push you into a higher tax bracket. As a result, if you don’t need the income, it can make sense to defer your State Pension for tax reasons. If you do decide to defer your State Pension, you will receive a higher amount when you claim it. Your State Pension payments would increase by 1% for every nine weeks you defer, which is just under 5.8% if you defer for a year.

Let’s Talk

If you want to make the most out of your retirement savings, a tailored financial plan that considers your assets, lifestyle decisions, and goals could help reduce your tax liability and give you peace of mind. If you’d like to arrange a meeting with us to talk about your retirement, please contact our LHP Wealth Management Team via Let’s Talk.

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