Written by Craig Pritchard Dip PFS, Senior Corporate IFA Consultant, Integrity365
An increasing number of retired individuals are considering returning to the workplace, often due to the lure of an offer from an employer looking to benefit from the skills and experience of the individual. However, this often creates questions as to what practical implications this will create from a pension perspective.
1. What are the tax implications of returning to employment after retirement?
If you are receiving pension income, you will be aware this is effectively treated as salary and subject to the standard rates of Income Tax. Many retirees will be basic rate taxpayers and when considering returning to the workplace, have concerns additional income will take them into higher rate tax bands.
This is possible (depending on current and potential income) however it may be possible to reduce or stop receiving income from your current pension/s if you are utilising flexi-drawdown or making regular withdrawals for income purposes. This will not only help preserve the value of your pension savings but also enable you to secure the respective income from the new employer whilst retaining tax efficiency.
2. Will I be enrolled into a workplace pension scheme if I return to work after retiring?
Employers have a legal obligation to enrol eligible employees into a workplace pension scheme if an employee will earn more than £10,000 per annum and are aged between 22 and the State Pension Age (SPA).
As a result, if you are below SPA when returning to the workplace, you will be enrolled into a new pension scheme at which point you will be given the opportunity to remain in the scheme or opt-out. This will be a personal choice depending on your circumstances and for some, benefitting from additional employer pension contributions to create a new pension will be worthwhile (you will typically have to contribute too). However, if you do not wish to participate the opt-out process is very straightforward and you can easily elect to not participate in the scheme.
If you return to the workplace beyond SPA, you will not be automatically enrolled into the scheme but will be invited to join to benefit from company contributions if you so wish.
3. Will joining a workplace pension after retirement impact any tax allowances?
If you are accessing pension benefits and considering returning to an employer’s workplace pension scheme, you need to be aware of the Money Purchase Annual Allowance (MPAA). This places an annual cap of £4,000 on contributions paid into a pension scheme if you take your current pension(s) via flexi-access or withdrawal taxable lump-sums from your pension.
The MPAA limit of £4,000 applies to contributions paid by all parties (i.e., employers, personal contributions) and care should be taken to ensure the total value of contributions paid into a workplace scheme does not take you over the limit as this will create a personal tax charge.
In addition to the MPAA, there is also a limit on the total value of pensions we can accumulate known as the Lifetime Allowance. The limit is £1,073,000 and care may be needed to ensure any new pension provision does not take you over this threshold as this will create an additional personal tax charge.
For some individuals, returning to the workplace may be right for many reasons. If you are unsure of the potential tax implications, or have any further queries regarding this topic, we would encourage you to discuss with an Integrity365 financial adviser on 0117 450 1300.