Thinking of returning to work? Here are 5 things to consider
The pandemic has undoubtedly influenced people’s attitude to work.
For some, lockdown provided a taste of what retirement might be like. For others, the tragedy of losing loved ones made them reassess what’s really important.
Around half a million people over 50 stopped working between December 2019 and December 2021, with some retiring, some being made redundant, and some forced to stop due to ill health.
The upshot is that there are now more than a million jobs available and no one filling the roles. This is causing real problems for the UK economy, and the government is looking to address them with changes to policies on pensions that will incentivise people to return to work.
But this is a huge decision - ultimately, there will be consequences for your tax liability and income generally if you start working again.
And deciding to return to work isn’t just a financial decision. It is inherently emotional, and there are consequences for your family members (for example, you may no longer be able to look after the grandkids after school).
Our five points below are important, but you should always be asking yourself, “What is it that I want to achieve, what is the end goal here?” And are the sacrifices required to get there worth it?
We can of course help you lay out all your options and, crucially, the implications on your financial future.
To get the ball rolling, here are five things to factor into your decision making.
1. Pension contributions
There are a few things to be aware of when it comes to retirement and re-entering the work force in terms of making further pension contributions.
You might be familiar with the term Annual Allowance – this is the limit on how much money you can build up tax-free in your pension in any one tax year while still benefiting from tax relief.
You can contribute up to £40,000 a year and receive tax relief on the full amount, however, if you have started drawing from a Defined Benefit pension, you cannot pay any more money into it. You do however have the option of paying into a separate pension, such as a different workplace scheme or personal pension.
If you’ve taken money from a Defined Contribution scheme, the amount you can contribute while still getting tax relief on it might reduce. This is known as the Money Purchase Annual Allowance, or MPAA. If you trigger the MPAA (by withdrawing cash from your pension) your Annual Allowance reduces to £4,000 a year.
People with large pensions will also need to make sure they don’t breach the Lifetime Allowance. This is the maximum amount you can build up in your pension over your lifetime without paying extra tax. The current limit is £1.073m – any pension savings over this amount will be charged 55% tax if withdrawn as a lump sum, or 25% if withdrawn as an income.
2. Mortgage payments
With mortgage interest rates now at around 5%, many people are wondering whether it’s a good idea to overpay their mortgage.
While this can shorten the mortgage term and reduce the overall interest you pay, it’s important to weigh up all the options. For instance, is it more important to own your home as soon as possible or to invest elsewhere to save for your future? Investing in the stock market could lead to greater returns, though never guaranteed of course and therefore riskier.
Whatever your approach, mortgage repayments are certainly worth reviewing along with pensions, savings and other investments.
3. Delay taking your pension
We recognise that not everyone can afford to delay taking their pension, but if you can, or if you can review your financial plan to allow you to do so, there are a number of benefits.
By delaying taking your pension you will:
- Maintain your £40,000 Annual Allowance, which can be carried forward
- Maximise the time your fund has to grow tax-free
However, if you start withdrawing from your pension early you run the risk of:
- Paying more in income tax
- Missing out on investment growth
- Being unable to enjoy the standard of living you hoped for in retirement
4. Delay taking your state pension
Again, if you can afford to, consider deferring your state pension as it increases if you leave it alone.
Your state pension increases by 1% for every nine weeks you defer. This means you can gain around 5.8%, or just over £600, if you defer it for a year. You’ll need to assess whether the 17 years or so it takes to accumulate the equivalent of losing one year’s state pension makes sense for you.
It’s also worth noting that if you’ve already started taking your state pension, you have the option to pause it by getting in touch with the Department for Work and Pensions.
5. Changing your investment strategy
How your pension is invested determines how much it will grow. Most investment strategies reduce the level of risk over time, so that as you approach retirement your low risk approach may be making less returns, but is far safer. This generally makes sense.
However, your pension may be invested for 20-30 years during your retirement, potentially longer if you return to work, so you may be missing out on potential returns if you leave it at the default low risk level.
‘Low risk’, ‘high risk’, it’s understandably vague; so, your best bet is to speak to us and we can explain the details of exactly what’s involved with each approach.
Always seek advice
Some people are desperate to go back to work, while others are certain it’s not for them. Many are somewhere in the middle.
As with most big decisions in life, it’s best to decide on the basis of as much information as possible. And to ensure that information is up-to-date.
Given the various pension policy reforms being discussed, we’ll keep a close eye on the next Budget and keep you informed of changes that might impact you.
For example, there are plans to change pension rules to encourage NHS staff, especially senior doctors, to return to work by enabling them to do so without their pension payments being reduced or stopped.
Employers may also be offering more incentives to encourage people to return to work, so keeping an eye on these and whether or not they make sense for you is another consideration.
So if you’re thinking of returning to work, or would like to speak to us in more detail about any of the above points, please give us a ring!