More retirees are planning to work in some way after they retire. While this 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.
According to a report from abrdn, just a third of people retiring in 2022 plan to give up work completely while two-thirds will continue to work. Flexible retirement is a growing trend, in 2020 just a third of retirees planned to continue working.
When asked how they will work in retirement, 24% of those retiring this year plan to work part-time in their current job or a new position, including in the gig economy. 15% will continue to work in their own business and 12% want to use retirement to become entrepreneurs.
So, while more retirees plan to continue working, many are exploring different options that will help them build the lifestyle they want.
Financial concerns are playing a role in the flexible retirement trend, but it’s not the only reason
While creating an income in retirement is a key reason behind the flexi-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.
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.
1. Will you access your pension while you work?
If you’re earning an income from working, will you still need to access your pension?
If you have a defined contribution (DC) pension, you can access it flexibly from the age of 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 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.
If you don’t need your pension to supplement your income, leaving it where it is can make sense. Money held in a pension is typically invested and can grow free from Capital Gains Tax. So, leaving it invested until you need it can help your savings go further.