What You Need To Know About Pensions and Flexible and Part-Time Work

Retirement as we have known it since it came about in the 1940s is changing. People are living longer than ever and retirement is no longer take a one-size-fits-all shape. From semi-retirement to retiring later, we are seeing more flexible, part-time working approaches later in life.

An increasing number of people are electing to reduce their working hours and take a more flexible approach to work for many reasons, from lifestyle habits, financial circumstances or to care for others.

Whatever your reasons may be for a similar change to your working habits, it is important that you understand the potential implications on your pension provision.

Pensions and part-time work before retirement

Many of us will have periods of part-time employment throughout our working life which may or may not impact your financial position. It is important you continue to save towards your retirement where possible and the best way of doing this is through your workplace pension scheme, if available.

Valuable employer contributions

Since automatic enrolment was introduced in 2013, employers are legally required to contribute into an employee’s pension once enrolled (or if you elect to opt-in if not automatically enrolled). The minimum employer contribution is 3%, but some employers are more generous and will contribute above this figure.

Accepting you are also likely to be required to contribute (typically 5%, but check your employer scheme rules), throughout your working career, the value of the employer contribution is likely to add up to a significant value which will be lost if you decide not to participate in your employer’s scheme.

It is often easy to decide against joining the workplace scheme due to potentially low contributions and/or affordability. However, you should strongly consider remaining in your employer’s scheme to maximise the benefits you receive whilst helping create a savings fund for your retirement.

State Pension implications

Throughout your career, whether employed or self-employed, you will build up an entitlement to the State Pension. Currently the weekly state pension is £179.60 per week, and in order to qualify for the full amount you need to have 35 qualifying years of National Insurance (NI) credits (you can check your position online - www.gov.uk/check-state-pension).

As an employee, you receive a credit for each tax year you earn above £184 per week (£9,568pa) but you may also receive a credit if you are not paying National Insurance but earn above £120 per week (£6,240pa).

Working part time will therefore only have an impact on your state pension if your income is below the above thresholds. There are, however, state benefits available in certain circumstances that provide National Insurance credits such as child benefit and the carers allowance.

Should you not qualify for National Insurance credits and have a shortfall in your NI credits, as you approach state pension age you are able to make voluntary NI payments if required.

Pensions and part-time work after accessing pension(s)

You may well have taken the decision to access your pension benefits and use the respective lump sum and/or income to supplement your earnings whilst working part time. This is an increasingly popular approach by individuals who do want to or have the means to fully retire.

Tax implications

You should remember that income take from your pension(s) is treated as salary, and therefore subject to income tax. As a result, any income you receive will be added to your salary/other earnings to create a total annual income which may result in you falling into a higher rate income tax bracket (40% or 45%).

Through careful planning, you may be able to reduce your tax liability by regularly reviewing the level of income you withdraw, depending on your salary/other income in a respective tax year.

We are typically able to access 25% of our pension benefits as a tax-free cash sum. With careful planning, you may well be able to use this capital to supplement earnings without the need for taxable income, and possibly invest for growth to increase the value in the long-term.

You should also note that there are potential tax implications of continuing to pay into a pension if you have taken taxable income from a Defined Contribution scheme. This is known as the Money Purchase Annual Allowance (MPAA).

The MPAA limits the amount you (or any employer or third party) can pay into a pension to £4,000 per annum. Exceeding this value will create a personal tax charge. You can read more about this in one of our recent articles – What is the Money Purchase Annual Allowance?

Tax planning and pensions are complex topics and so financial advice is often best sought to ensure you take the most appropriate action for your personal circumstances.

The content contained herein is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or any other advice.

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