One of the most significant announcements in the spring Budget was that the pension Lifetime Allowance (LTA) charge would be removed from 6 April 2023.
The government also plans to abolish the LTA entirely in a future Finance Bill.
Previously, the LTA limited the total amount of wealth you could build in your pension without facing a tax charge when you came to withdraw from it.
At the time of the change, the LTA was £1,073,100. Prior to 6 April 2023, if you had more than this in your pension, you would likely have paid tax when drawing any funds that exceeded the threshold.
Consequently, people may have felt that there was little incentive to continue working and contributing to their pension if they reached this limit.
However, now that the LTA charge no longer applies, you may be able to pay more into your pension without facing additional tax charges when you come to withdraw it.
Further to this, the government also increased the Annual Allowance – the amount you can save into your pension each tax year while still being able to benefit from tax relief – from £40,000 to £60,000. This means you may be able to make more tax-efficient contributions to your pension each year.
As a result, many people are considering delaying their retirement, working for longer so they can continue building their pension savings.
According to This is Money, two-thirds of top earners surveyed said they would continue working for longer. Additionally, 1 in 5 people who had already retired planned to return to work.
But despite the removal of the LTA, delaying retirement may not always be the best choice. As such, it is important that you think about your own goals in retirement to ensure that postponing is a suitable option for you.
If you are thinking about delaying your retirement after changes to the LTA, read on to learn more about some important considerations.
Delaying retirement by 1 year could give you a significant income boost
One of the key reasons you may want to delay retirement is that you can now pay more into your pension without triggering a tax charge when you come to withdraw from it.
This may be beneficial because, by working and paying into your pension for longer, you could boost your income when you eventually do retire. Plus, your employer may also contribute to your pension, so your savings could increase significantly in a relatively short time.
A study reported by PensionsAge demonstrates the difference that this could make. The results showed that a 60-year-old with a pension of £200,000 could generate an income of £4,900 a year if they purchased an annuity. These calculations are based on the top three annuity rates at the time.
However, if they deferred their retirement for a year and continued to contribute £200 a month into a workplace pension, their annual retirement income could grow to £5,700 – an increase of 16%.
Additionally, leaving your pension savings invested for longer allows the potential for more growth.
This extra retirement income may be more attractive than ever considering inflation was 6.7% in the 12 months to August 2023, according to the Office for National Statistics (ONS).
While inflation could come down in the future, many people approaching retirement are concerned about the rising cost of living.
Indeed, PensionsAge reports that 39% of employees expect their pension to provide only enough income to “just get by” in retirement.
If you are concerned about a potential shortfall in your income, delaying your retirement could give your savings a valuable boost. Ultimately, this could mean that you enjoy a more comfortable retirement.
You can defer your State Pension
Much of your retirement income will likely come from your private pension and other savings, but your State Pension may still offer a welcome boost.
If you delay your retirement, you could increase the amount you receive from the State Pension as you are able to defer your payments.
Currently, if you were born before 5 April 1960, you can start drawing your State Pension at age 66. For those born after this date, there will be a phased increase in the State Pension age to 67, and eventually 68.
If you are still working when you reach your State Pension age, you can defer the payments. This results in higher payments when you do eventually start drawing the funds.
According to NI Direct, your State Pension payment increases by 1% for every nine weeks that you defer.
If you deferred for just one year, for example, you would get an additional £11.82 a week on top of your normal payment, assuming you qualify for the full State Pension.
Additionally, if you defer for at least 12 months, you can claim a lump sum payment. This includes interest paid at 2% above the Bank of England (BoE) base rate.
Consequently, if you delay your retirement for several years, these extra funds could build up alongside your private pension, giving you a welcome increase to your income.
You could miss out on a good annuity rate
As the cost of living rises, many people are concerned about how far their pension savings will go. If you need to draw more from your pension to fund your lifestyle, you could deplete your savings much faster.
Meanwhile, the guaranteed income from an annuity may help you prevent this. Annuities could also be a popular choice because the average rates are rising, so you may receive more income than you previously would have when buying an annuity.
According to Legal & General, in August 2023 annuity rates reached their highest level in 14 years. As such, if you purchase one soon, you may receive a healthy, guaranteed income for the rest of your life.
Annuity rates are high because they are linked to interest rates. Currently, interest rates are rising because the BoE has been increasing its base rate in an attempt to control inflation.
There is no guarantee that interest rates will remain at their current level in the future. As such, if you delay your retirement, interest rates could drop and annuity rates may fall with them. This might mean that you could miss out on the current favourable rates.
You may need to review where your pension is invested
If you plan to delay your retirement and leave your pension savings invested for longer, you may need to review the underlying investments.
A common strategy is to move pension funds into lower-risk investments when approaching retirement to protect savings from potential market volatility.
That said, if you plan to delay your retirement, you may be willing to take a slightly riskier approach as you have longer for investments to recover after a period of market turbulence.
Whatever you decide to do, it is important to review your pension savings to ensure that they’re invested in a way that aligns with your new plans for retirement.
Delaying for too long could mean you miss out on retirement goals
Your retirement plan will typically focus on ensuring that you generate enough income to fund your lifestyle and achieve your goals in later life.
Those goals are the crucial thing here, and the income you generate simply facilitates them. As such, it is important that you don’t sacrifice your retirement dreams, just so you can generate a higher income.
Unfortunately, delaying retirement for too long could mean that you are less able to achieve the things that you want to in later life. For example, if you plan to travel a lot or take up active hobbies, this may be more difficult when you are older as you may be less resilient and could be more likely to face health problems.
So, when deciding whether to delay your retirement or not, consider what level of income you need to achieve your desired lifestyle. If you already have enough in your savings, delaying your retirement could just mean delaying your enjoyment.
Conversely, if you do not have enough savings, staying in work may help you build adequate funds, so you don’t have to make sacrifices in retirement.
Get in touch
If you want to explore the possibility of delaying your retirement, we can help you decide whether it is the right choice for you.
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 investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Past performance is not a guide to future performance and should not be relied upon.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
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