Guide to working during retirement
Thanks to dwindling savings and economic uncertainty, the number of UK residents who are working beyond the state pension age of 61.5 for women and 65 for men has nearly doubled since 1993. Today, 1.4 million individuals in the UK work past the state pension age. Whether they need the income or simply enjoy what they do, it is obvious that more and more older individuals are deciding to remain in the workforce.
Default pension age: A thing of the past
Although the majority of individuals choose to retire upon reaching the state pension age, the UK’s default pension age officially ended a short time ago in 2011. So, individuals are able to continue working when they reach 65 years of age.
Some companies are still able to implement a designated cut-off age, but this must be objectively justified. For instance, jobs that involve heavy or repetitive lifting and a certain level of physical fitness are able to designate a required cut-off age. Today, most employers discuss retirement with employees approaching the state pension age during the employee’s annual review, and both parties reach an agreement most of the time.
That being said, many individuals who continue working beyond the state pension age choose to reduce their hours to part-time. In fact, two-thirds of people who continue working after they reach the state pension age work on a part-time basis.
National Insurance is not required for older workers
You are no longer obligated to pay into National Insurance once reach the state pension age. If you continue to work for an employer, you need to provide them with your passport, birth certificate, or certificate of age exception and check your pay stubs to ensure that contributions to National Insurance are no longer being automatically deducted from your pay.
You can choose to stop paying National Insurance if you are self-employed as well. However, you may still be required to make a certain amount of Class 4 contributions during the first year after reaching the state pension age.
Receiving a state pension while you are working
You can start receiving your state pension as soon as you reach the state pension age, regardless of whether you continue working or not. Your state pension will be considered as income and will be taxed exactly the same as your earnings. However, it is not deducted from your pay. Instead, it is considered a gross tax and must be paid via a self-assessment tax return or PAYE.
Receiving a private pension while you are working
You are also able to receive a private pension and continue working as well. However, you must pay into a different scheme than the one you are drawing pension funds from. Similar to a state pension, a private pension is also considered as taxable income, but it is typically paid as net via PAYE.
Deferring a state pension while you are working
If you continue to work beyond the state pension age, you can defer your state pension until a later date. As compensation for deferring your pension, you are able to draw a higher rate or take out a lump sum when you choose to claim it at a later date.
In fact, you are able to draw 10.4 percent more for every year after your deferment. If you take a lump sum, you will be able to claim the value of the pension plus the two percent base rate as dictated by the Bank of England.
Deferring a private pension while you are working
You are also able to defer a private pension, but doing so will not be as financially advantageous, because your entitlement will not increase to compensate for years of lost income. Most scheme rules dictate a specific age at which you are expected to stop accruing additional pension and start claiming.
If you have a defined contribution scheme, you could decide to delay an annuity purchase in an attempt to receive a higher rate, but you will risk being exposed to falling rates in the process. For instance, if you delay purchasing an annuity for five years, you will risk not receiving enough added funds to compensate for the years you lost out on receiving payment.
Being a business owner during retirement
An increasing number of older individuals choose to forego a traditional retirement by becoming a business owner instead. In fact, approximately 30 percent of individuals working past their state pension age are now self-employed. This is in stark contrast to the 13 percent of self-employed younger workers.
Owning a business can be an extremely rewarding venture, but it also requires careful planning. You will need to keep detailed income and expenditure reports as well as be prepared to provide them to the HRMC. You will be able to deduct some of the incurred expenses, and the losses you incur can be deducted from future profits. Due to the complexities of business tax law, an accountant may prove tremendously beneficial, especially if you have no prior experience as a business owner.
