flexibility can boost your income and help you strike a work-life balance that suits you, it can lead to some tax implications that you need to consider.
retirement trend, it’s not the only one. In fact, 32% said they want something to keep them busy.
Creating a sustainable income that will last throughout your retirement can be difficult to understand. You will often need to consider a range of factors, from life expectancy to potential investment returns. So, it’s not surprising that only a quarter of 2022 retirees are confident that they’ve saved enough.
Higher levels of inflation are adding a layer of complexity.
In the 12 months to April 2022, inflation reached 9%. 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.
Despite this, 27% of retirees said they didn’t know how to mitigate the effect of inflation on their 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 your 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.
3 important questions to consider if you’ll work in retirement
One of the reasons tax 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.
.1. Will you access your pension while you work?
However, your pension may be subject to Income Tax, so it’s important to
understand how withdrawals will affect your overall tax liability. If your total income exceeds tax thresholds, you could find you pay a higher rate of Income Tax than you expect.
.2. Will you continue to pay into your pension?
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.
.3. Will you claim the State Pension?
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. 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 us.
understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from
April 2028). The fund value may fluctuate and can go down, which would have an
impact on the level of pension benefits available. Past performance is not a
reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual
circumstances. Thresholds, percentage rates and tax legislation may change in
subsequent Finance Acts.