For many people, retirement represents an opportunity to reap the rewards of their hard work over the years. It’s a time for travelling, spending time with family, and taking up new hobbies now that they are no longer at work.
However, not everybody shares those dreams. In fact, new research from Canada Life found that 13% of those who had not already retired said that they never planned to stop working.
This may, in part, be due to the cost of living crisis. 34% of respondents said this is why they have changed their retirement plans.
Additionally, the government removed the Lifetime Allowance (LTA) charge in the Spring Budget and announced plans to abolish it altogether in a future finance bill. They also increased the Annual Allowance from £40,000 to £60,000, allowing you to save more into your pension without facing a tax charge.
That said, forgoing retirement altogether is a big decision and it may be important to consider how this affects your financial plan.
Read on to learn about five important financial considerations if you don’t want to retire.
1. Can you still meet your goals in later life?
Before considering any of the financial aspects, it may be useful to think about your goals in later life and whether you can still achieve them if you don’t retire.
For instance, if you planned to travel a lot or spend more time with your family, will you have time to do this while you are working? In some cases, forgoing retirement could mean sacrificing important goals.
Conversely, you may have a higher income if you continue working, and this could make it easier to achieve certain goals such as purchasing a holiday home or supporting your family. Additionally, it may be easier to manage expenses such as care costs if you continue working for longer.
You may also want to consider “semi-retirement” – continuing to work part-time instead of retiring altogether.
Research by Aviva shows that this is becoming more common, particularly as people are concerned about the cost of living crisis and whether they can afford to fully retire. It found that 44% of 55- to 64-year-olds planned to move into semi-retirement before they reached State Pension Age.
This may allow you to continue working while also giving you more free time to pursue your goals in later life.
2. Will the Money Purchase Annual Allowance affect you?
If you plan to draw from your retirement savings to supplement your income while you are working, the Money Purchase Annual Allowance (MPAA) could affect you.
In the 2023/2024 tax year, you can contribute up to £60,000 to your pension while receiving tax relief. This is known as your “Annual Allowance”.
However, when you draw flexibly from a defined contribution (DC) pension, you may trigger the MPAA and the amount you can contribute to your pension and receive tax relief on each year could be reduced to £10,000.
You may trigger the MPAA if you:
- Take all or part of your pension pot as a lump sum (though there are different rules for smaller pots)
- Transfer your pension into flexible drawdown and start taking an income
- Purchase an annuity.
You may need to consider how this will affect you, so you can continue building tax-efficient savings while also drawing flexibly from your pension.
3. How much tax will you pay?
When you earn a full-time salary and draw an income from your pension to supplement it, you may find it more difficult to stay in a lower tax band. As a result, you could lose a significant amount of the funds you draw from your pension to Income Tax.
That’s why it’s important to consider how you draw from your savings and ensure that you are being as tax-efficient as possible.
For instance, you can typically take up to 25% from your pension as a tax-free lump sum, but you do not need to take the full amount at once. If you only take what you really need, you may be able to spread the 25% over multiple tax years and potentially reduce the Income Tax you pay.
It could also be beneficial to use savings in a Cash ISA before drawing from your pension as you won’t pay Income Tax on these funds. Alternatively, you might generate a portion of your income from investments in a Stocks and Shares ISA, which are also free from Income Tax, Dividend Tax, and Capital Gains Tax (CGT).
Additionally, increasing your pension contributions may help you reduce the Income Tax you pay because you benefit from tax relief. That said, it is important to consider whether you will exceed your Annual Allowance – or the MPAA if you have already started drawing from your DC pension – or not.
A financial planner can help you consider the various tax implications of forgoing retirement, so you can make your wealth as tax-efficient as possible.
4. Are you adopting an appropriate level of risk with your investments?
Often, people transfer their wealth to investments with a lower level of risk when they approach retirement. This is because they may be more likely to need the funds soon, so they don’t have time to wait for investments to bounce back after a significant drop in value.
However, if you plan to continue working, you may be able to leave your wealth invested for longer.
In this case, it may be useful to consider the level of risk you adopt and whether it is still appropriate for your current financial plan. You may find that you are comfortable with a slightly higher level of risk if you are not reliant on that wealth to fund your lifestyle in the short term.
Having a conversation with your financial planner can help you determine what level of risk is suitable for you. They can then help you make adjustments to your investment strategy, if necessary.
5. How will you pass wealth on to your family?
Regardless of whether you plan to retire or not, leaving wealth to your family may be an important part of your financial plan.
If you plan to forgo retirement, you may not need to draw as much from your pension as you otherwise would because you already have an income.
However, your pension could play an important role in your estate plan because it can be an effective way to pass on your wealth. Your pension typically falls outside of your estate, so your family do not normally have to pay Inheritance Tax (IHT) on it.
As such, you may want to increase your pension contributions, even if you do not plan to draw from your pension to fund your lifestyle later in life.
Get in touch
Even if you don’t intend to retire, it is still important to plan for the future and we can give you the guidance you need.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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.
Approved by the Openwork Partnership 10/10/2023
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