Retirement may be a very important transition for you. It represents the end of your working life and an opportunity to reap the rewards of years of hard work. You may have big plans for your later years such as travelling the world or taking up new hobbies, and retirement marks the beginning of this new phase of life.
However, while many see retirement as a distinct line in the sand, an increasing number of people are choosing to “unretire” and return to work.
You might have considered this option and, in some cases, it could be the right choice. However, there are some potential downsides you may need to be aware of.
Read on to learn why more people are unretiring and some important factors to consider if you want to return to work.
2.8 million over-50s have returned to work after previously retiring
The cost of living crisis has dominated headlines in the past few years, and you may have noticed an increase in your expenses. This rise in living costs is one of the reasons that so many people are choosing to unretire.
Indeed, according to Legal & General, 2.8 million over-50s have returned to work after previously retiring and 37% said it was because they needed a higher income to cope with increased expenses.
Conversely, 62% said they returned to work to stay mentally active and 32% enjoyed the sense of purpose.
Whatever your reasons for wanting to return to work, there are some important factors to consider.
Returning to work could make it easier to manage increased living costs
If you’re concerned about the cost of living, unretiring may be beneficial. You could return to work full-time and rely solely on your salary to fund your lifestyle. However, Legal & General found that only 3% of people who unretired planned to return to full-time work.
Instead, you might work part-time and use your earnings to supplement the income you draw from your pensions or savings. This could make it easier to fund your desired lifestyle as your expenses increase.
Additionally, you could continue building your retirement pot, meaning that you may have more wealth to draw on in later life if you do eventually retire again.
However, it’s important to note that there may be certain tax implications if you make further pension contributions after you’ve already drawn an income from your pensions.
The “Money Purchase Annual Allowance” may affect you
When you contribute to your pensions, you immediately benefit from 20% tax relief. If you’re a higher- or additional-rate taxpayer, you may be able to claim another 20% or 25% tax relief through self-assessment.
Your “Annual Allowance” limits the amount you can contribute to your pension each year without triggering an additional tax charge. In the 2024/25 tax year, this stands at £60,000.
However, if you have flexibly accessed a defined contribution (DC) pension you will trigger the “Money Purchase Annual Allowance” (MPAA). This effectively reduces your Annual Allowance to £10,000 in 2024/25.
Consequently, if you retire and start drawing an income from your pensions and then later return to work, you may not be able to make as many tax-efficient pension contributions as you previously could.
It’s important to consider this if you plan to continue building wealth in your pensions. We can help you explore the most tax-efficient ways to build your savings if you decide to unretire.
You could benefit from deferring your State Pension
You may rely on your personal pensions to fund your lifestyle in retirement, but you could be entitled to State Pension payments too.
In 2024/25, the full State Pension is £221.20 a week. Additionally, the State Pension amount is protected by the “triple lock”. This means the amount you receive rises each year by the higher of:
- Inflation
- Average wage growth
- 2.5%.
You receive State Pension payments for the rest of your life, so they could be a valuable supplement to your other retirement savings.
Normally, you can begin claiming your State Pension from 66 (there is a phased increase to 67 and eventually 68 for those born after 5 April 1960).
Yet, if you decide to return to work, you might not need your State Pension payments to fund your lifestyle.
Fortunately, you can defer your payments, and this might mean that you receive higher payments later in life when you do begin claiming the State Pension.
According to MoneySavingExpert, your payments could increase by 5.8% for each year that you defer. This means that even if you only deferred for a year, you could receive an extra £667 annually for the rest of your life.
This amount could rise as your State Pension payments increase over time too.
As such, you might benefit from forgoing your State Pension if you return to work, and then taking the increased payments later if you fully retire and need the income.
Also, bear in mind that you may pay Income Tax on your State Pension income, so taking the payments when you don’t need them could mean you pay more tax unnecessarily.
Working might mean sacrificing certain life goals
Returning to work could make it easier to manage increased living costs and build more savings for the future. However, you may want to consider whether unretiring could affect your ability to achieve your goals in life.
For instance, if you had plans to travel the world or spend lots of time with your family in retirement, this may be more difficult if you’re still working.
That’s why it’s important to find a balance between the financial considerations and your wider goals in life.
Professional advice could be beneficial here as we can help you manage your wealth in a way that allows you to fund your dream lifestyle.
Get in touch
If you’re considering returning to work after retiring, we can give you valuable guidance.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
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 performance.
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.
Workplace pensions are regulated by The Pension Regulator.