master-admin, Author at Investing For Tomorrow

Building a financial safety net

For mothers, establishing a solid emergency savings fund is not merely advisable—it’s essential. Unexpected expenses, like urgent car repairs or household emergencies, can arise without warning and impact your financial well-being. By maintaining an emergency fund that covers at least six months’ worth of essential expenses in an easily accessible savings account, you can safeguard against the financial strain these costs might impose, ensuring your long-term financial goals remain on track.

Consider setting up an automatic monthly transfer to your savings account to build this fund gradually. This approach makes saving more manageable and ingrains a habit of prioritising financial security.

Protection for your loved ones

It may be prudent to secure an income protection policy in families where your income contributes significantly to bills, childcare, or educational costs. This insurance cover offers a financial lifeline if you cannot work due to a long-term illness, ensuring your children’s lifestyle remains unaffected by financial instability. Similarly, life insurance is essential, providing a financial safety net to your family in case of your premature death.

Life insurance can cover critical expenses, such as mortgage repayments, alleviating financial burdens and offering peace of mind. When exploring insurance options, assess the cover that best suits your family’s needs and consider the premiums in relation to your budget, opting for policies that provide comprehensive protection.

Securing your retirement future

Taking time off work to raise children can significantly impact your pension savings, making it imperative to focus on bolstering your retirement funds. A fundamental step is to ensure you qualify for the full state pension by maintaining National Insurance (NI) contributions. Mothers who are not currently working can still earn NI credits by claiming child benefit, protecting their state pension entitlement.

Furthermore, consider topping up workplace or private pensions, which come with tax benefits, making them a cost-effective saving method. The tax relief on personal pension contributions means you gain more from your savings, substantially boosting your retirement fund. For instance, if you receive cash gifts or inheritances, if appropriate, directing them into a pension could significantly enhance your financial security in retirement.

Investing in your children’s future

If it’s within your means, investing in your children’s future can offer them substantial long-term benefits, potentially aiding with university fees or a first home deposit. Investing in the stock market can yield greater growth compared to traditional savings accounts. A Junior

Individual Savings Account (JISA) allows tax-free growth and locking funds until your child turns 18. This structured investment approach can help in securing their financial independence.

When investing for your children, consider diversifying the portfolio across various asset classes to balance risk and return, and regularly review the investment performance to ensure it aligns with your financial objectives.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.

Whether you’re employed or self-employed, income protection is a long-term insurance policy designed to ensure you receive a regular income until you either retire or are fit to return to work.

Surprisingly, only a small fraction of the UK population – less than one in ten, to be precise – has this type of cover in place, according to research[1]. This is despite the alarming statistic that 42% of UK adults are concerned about their household’s ability to cope financially if they cannot work[2].

Gender protection gap

There is also a notable gender protection gap. A significant 29% of women surveyed indicated that they couldn’t afford protection, in contrast to 23% of men. Moreover, over a quarter of women admitted they would have to rely on their partner’s income if they found themselves unable to work. This reliance underscores the importance of personal financial independence and protection planning.

Replace a portion of your income

Income protection insurance offers regular payments that replace a portion of your income. These payments are made until you can return to work, retire, pass away, or reach the end of the policy term – whichever happens first. Typically, the policy covers between 50% and 65% of your income, addressing a wide range of illnesses that may prevent you from working, both in the short and long term.

Claim as many times as necessary

A significant advantage of this type of insurance is its flexibility. You can claim as many times as necessary during the policy’s lifespan. However, it’s important to note that there is often a pre-agreed waiting, or ‘deferred’, period before payments commence. Typical waiting periods range from four weeks up to a year, with longer waiting times generally resulting in lower monthly premiums.

Few employers offer extended support

It’s crucial to differentiate income protection from critical illness insurance, which provides a one-off lump sum upon diagnosis of a specified serious condition. When unable to work due to illness or an accident, many people might assume their employer will continue to provide some income support. The reality is that employees often transition to Statutory Sick Pay within six months, with few employers offering extended support beyond a year.

Evaluating your employer’s support

It’s essential to verify what support your employer offers if you become incapacitated.
The loss of income can quickly erode savings and make it difficult to cover essential household bills, especially if you’re self-employed and lack sick pay benefits. This is where income protection insurance becomes invaluable, providing the peace of mind that your financial obligations are met, even in the face of adversity.

Source data:

[1] The survey data was collected and analysed by Censuswide Research. The total sample size was 4,043 UK adults, including 1,000 self-employed and 1,000 private renter respondents. Fieldwork was undertaken between 17th and 29th April 2024. The survey was carried out online. The figures have been weighted and represent all UK adults (aged 18+).
[2] The survey data was collected and analysed by YouGov plc. The total sample size was 2,059 adults. Fieldwork was undertaken between 2nd – 8th February 2024. The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL, OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

Having a documented retirement plan can help you feel more prepared for this stage of your life, ensuring you have a sufficient income when you stop working. Here, we explore several factors to consider when reviewing your savings. If you don’t yet have a plan, in this article, we consider a helpful starting point.

Revisit your retirement plan

It’s always a good idea to reassess your plan to ensure you’re on track to achieve the retirement income and lifestyle you desire. Priorities and circumstances can change, necessitating adjustments to your plan.

Begin by asking yourself these three key questions:

How would you like to spend your retirement?

Consider what you’d like to do during your retirement to help determine how much money you’ll need. Whether it’s holidaying, investing more time in hobbies or starting a new business venture, it’s crucial to account for everyday expenses such as rent or mortgage payments, household bills and food shopping. Additionally, it’s wise to set aside savings for potential medical needs or home care as you age.

When planning your expenses, don’t forget to factor in inflation. Prices tend to increase over time, so having an extra financial cushion can be beneficial.

When would you like to retire, and for how long?

Is the age you’d like to retire still the same, or has it changed? With life expectancy increasing, you’ll need to consider how much money you’ll need throughout your retirement. Dividing the total figure into an annual salary, followed by a monthly income, will help you determine if your savings are sufficient.

Consider how you’ll access your retirement income. Different options have various terms and conditions that affect your take-home pay.

Debt repayments before retirement

If possible, set goals to pay off any debts before you retire. Clearing debts can provide peace of mind, as it’s one less expense to worry about.

Check your pension contributions

Your retirement fund could include workplace pensions, personal pensions, Individual Savings Accounts (ISAs), investments and the State Pension. When reviewing your pension pot, check the amount and track performance, and take action if necessary.

Consider the following when reviewing your pension pot:

Review your workplace pension contributions. Can you afford to increase them, even slightly? Even small annual increases can make a significant difference over time.
Check your employer’s contributions. Many employers offer benefits such as matching increases in your contributions to your workplace pension.
Keep track of all your pension pots to avoid forgetting about them. Consider whether you want to keep working part-time or flexible hours, which will give you more time to improve your savings.
Remember, the value of investments can fall as well as rise, and there are no guarantees. When you start drawing benefits, the value of your pension pot might be less than the total contributions made.

The State Pension as an income source

The State Pension alone is unlikely to support your retirement. If you’re eligible, the amount you receive will depend on your National Insurance contribution record. You can check your State Pension forecast on the government’s website to see how much you could receive when you can claim it and if you can improve it.

Understand your retirement income options

From age 55 (57 from April 2028), you can access some or all of your pension benefits. Personal circumstances, lifestyle and health will influence your right income option. Some contracts restrict your options, and there are tax implications to consider.

Control over your relationship with money

Planning for retirement is a step towards improving your financial wellbeing. It’s about how you feel regarding control over your financial future and your relationship with money. Focus on what makes your life enjoyable and meaningful now and in retirement.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

The allure of a different lifestyle, potential cost savings and the opportunity to explore new cultures are compelling factors driving this trend. Whether individuals plan to return to the UK eventually or settle abroad permanently, the initial decision to relocate marks the beginning of an exciting, albeit complex, journey.

Becoming a UK expat is an exciting chapter filled with many opportunities, but it also comes with its own set of challenges. One of the most critical aspects to consider when planning a move overseas is the management of your pension.

Managing your UK pension overseas

Deciding whether to leave your pension in the UK or transfer it to your new country involves navigating complex tax implications, understanding how to access your pension pot and determining the feasibility of contributing to a UK pension while living abroad. Proper planning and seeking professional financial advice are essential steps to ensure that your move is not only adventurous but also financially sound.

Your personal circumstances, the rules of your new country and the terms set by your existing pension provider will all impact these decisions. It’s crucial to take the time to assess your available options. Given the complexities, it is important to obtain professional financial advice. This ensures you make the right choices for your financial future and provides peace of mind.

What happens to my UK pension?

When you move abroad, any pension plans you have in the UK won’t follow you unless you arrange for them to be transferred overseas. Instead, they’ll stay where they are, meaning once you reach 55 (57 from 6 April 2028), you can start taking money from them, even while you’re overseas.

Claiming your State Pension abroad

You can still claim your UK State Pension abroad, provided you’ve paid enough UK National Insurance contributions to qualify. Just like if you stayed in the UK, you need 35 years of National Insurance contributions to get the full State Pension and at least ten years to be entitled to a reduced payment. However, you must notify the Department for Work and Pensions (DWP) of your move.

State Pension increases and qualifying countries

It’s worth noting that the State Pension only increases annually in certain countries. These include any country in the European Economic Area (EEA) and Switzerland and countries with a social security agreement with the UK.

Transferring your UK pension plans

You can usually transfer your UK pension plans to a different scheme abroad, but it must be a Qualifying Recognised Overseas Pension Scheme (QROPS). This type of scheme follows similar rules to UK schemes and is listed on GOV.UK. You might be able to make this transfer tax-free, but depending on your circumstances, you might need to pay a 25% tax on the amount you’re transferring out of the UK.

Overseas transfer allowance

There is also an ‘overseas transfer allowance’, which caps the amount of pension savings you can transfer out of the UK. Unless you have protection in place, the allowance is usually £1,073,100. If you transfer more than this, you’ll normally need to pay a 25% tax charge on the excess. Transferring to a scheme that isn’t a QROPS may be considered an unauthorised payment and could result in a 55% tax charge and additional penalties.

Importance of professional financial advice

Transferring a pension plan overseas is a significant decision and may not be right for everyone. You could lose valuable benefits and guarantees associated with your UK pension. If you’re considering this option, professional financial advice is essential to ensure it’s the right choice for you. Obtaining financial advice is a legal requirement if you’re transferring a defined benefit plan worth more than £30,000.

Accessing your UK pension funds

If you’re abroad, you’ll generally be able to access your money like you would in the UK. However, some providers may limit payment options. It’s vital to contact your existing provider to understand the available payment options. If your existing plan doesn’t offer what you need, shop around for a better option, though some providers may not let you open a new plan if you live abroad.

Receiving payments abroad

Some providers will pay into an overseas bank account, although they might charge extra for this service. Others may only pay into a UK account. The exchange rate will also affect how much you receive when your pension money is converted into your local currency.

Tax implications on UK pensions

Living abroad complicates your tax situation. You might need to pay UK Income Tax on withdrawals from a UK pension plan, as it counts as UK income. However, the country you’re living in might also tax you. The UK has double-taxation agreements with numerous countries, potentially allowing you to get tax relief or a refund to avoid paying tax twice.

Tax-free allowances and overseas considerations

In the UK, you can typically take up to 25% of your pension plan tax-free, with a total tax-free amount across all pension plans being £268,275. However, this might not apply in your new country, where it could be taxed as income. It’s important to investigate the tax implications in your new country.

Continuing pension contributions

You should check with your provider if you can continue paying into a UK pension while living overseas. This depends on the rules of your pension scheme, and you may not be eligible for tax relief on these payments. Depending on your circumstances, the amount of tax relief you receive could also be limited.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

THE FINANCIAL CONDUCT AUTHORITY DO
NOT REGULATE TAX PLANNING.

The scenario is particularly alarming given that many individuals have diligently planned for retirement yet find their savings insufficient to support their desired lifestyle. The discrepancy between expectation and reality underscores the critical need for robust financial planning and a reevaluation of current pension strategies to ensure that retirees can enjoy the fruits of their labour without undue financial stress.

Ability to afford retirement

Adding to the gravity of the situation, over a quarter (27%) of those who have laid out retirement plans express scepticism about their ability to afford retirement altogether. This lack of confidence stems from various factors, including the rising cost of living and stagnating wage growth, which erodes the value of pension savings over time.

The financial insecurity future retirees face threatens their quality of life and places additional pressure on state and private pension systems. It is imperative for individuals and policymakers alike to address these challenges through comprehensive financial education, improved pension schemes and supportive public policies aimed at enhancing the financial resilience of the ageing population.

Younger generations want earlier retirement

A recent report reveals that younger individuals aspire to retire even earlier. Those aged 18-29 wish to retire at 61, although they are willing to work until 64 if necessary. This is four years shy of the age at which they can access their State Pension.

Only a third (34%) of respondents believe they are adequately preparing for retirement, and 38% are not on track to achieve even a minimum retirement lifestyle, as defined by the Pensions and Lifetime Savings Association. This figure has increased by 3% from last year, equating to an additional 1.2 million people, more than the combined working populations of Liverpool and Birmingham.

Impact of rising living costs

The projected increase in those facing inadequate retirement outcomes is primarily driven by rising living costs, such as a 15% increase in rents, compared to an average wage growth of just 6.2%[2]. Survey participants also highlighted the reliance on the State Pension, with just over half (54%) expecting it to form a significant portion of their retirement income.

Three-quarters (75%) deem the State Pension crucial for covering everyday necessities. However, 12% of respondents doubt that this level of support will be available by the time they retire.

Growing gap in retirement outcomes

The widening gap in retirement outcomes and the quality of later life between current retirees and future retirees is concerning. People are considering how their private pension pots might work in conjunction with their State Pension Entitlement to plan their retirement.
Despite this, reliance on the State Pension remains strong. While some individuals will use their private pension to gain the retirement flexibility they seek, many realise they might have to work much longer than anticipated.

Call for government action

Britain is far from achieving sufficient savings to provide future pensioners with their desired outcomes. In the meantime, it is crucial to help people maximise their existing resources. This is an opportune moment for the new government to adopt a comprehensive approach to financial resilience throughout people’s lives, particularly focusing on those predicted to have lower retirement outcomes.

Source data:
[1] The research was conducted online by YouGov on across a total 5,072 nationally representative adults aged 18+ in the UK between 21/03/2024 – 05/04/2024. Pension and Lifetime Savings Association (PLSA)’s living standards used as a measure. The PLSA defines a minimum retirement as someone living with no car, spending £50 per week on groceries and spending £20 for each birthday and Christmas present. The latest PLSA thresholds have increased from 8-34%.
[2] Index of Private Housing Rental Prices, UK: monthly estimates

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

Rising inflation and interest rates

Has the squeeze got tighter? Rising inflation and interest rates have created clear winners and losers. Those with mortgages have been among the losers. As fixed rate deals have ended, moving onto a variable or new fixed rate has meant accepting higher payments or extending terms to keep monthly outlays the same.

Coupled with inflation, this has reduced real disposable incomes. The winners have been those who are debt-free and those who have savings and investments. Typically, these individuals are retired, and the increased income may be surplus to requirements.

The cost of education

School fees and care costs have historically risen faster than inflation. The cost of private education has soared. Fees jumped by an average of 5.1% in 2022[1]. The average cost per child is now £6,944 a term for day pupils and £12,344 a term for boarders[2]. There are big regional variations, too. With the rising cost of living, private schools have had little choice but to pass energy and food costs on to parents. Imagine those costs for a family of four.

It is no wonder house prices are so high in the catchment areas of state schools with good Ofsted ratings. Many parents or guardians rely on other sources for some or all of the fees, such as loans, inheritances or other payments.

University and housing

School may lead to university, with its accompanying student debts. Children may be dependent on their parents for longer and not leave the nest as quickly as one might hope. Rising rents mean the aspiration to get on the property ladder may only be achieved after age 30 and will require some financial assistance.

The mounting cost of care fees

If you are paying for care, the average weekly cost of a residential care home in the UK is £1,160, while average fees at a nursing home cost £1,410 per week[3]. This means residential care for a whole year (52 weeks) costs an average of £60,320, and nursing home care costs an average of £73,320 annually. Fees will vary depending on the area you live in and the home you choose.

The families of those in care homes are unlikely to pay the entire bill but may top this up to ensure a better quality of life, such as an ensuite room, visits from the hairdresser, entertainment and day trips. As parents may live some distance away from other family members, time and practicalities may create the need to move closer, leading to inevitable upheaval and losing a friendship network.

Role of inheritance

Our elderly relatives play a crucial role in the upcoming shift in wealth. They’ll be vital in the wealth transfer over the next 10-15 years. The ‘sandwich generation’ – those caring for their children and ageing parents – are set to inherit significant assets. Figures from HM Revenue and Customs (HMRC) show a record-breaking increase in Inheritance Tax (IHT) receipts, reaching £7.5 billion from March 2023 to April 2024. This is a jump of £400 million compared to the previous year and continues a trend that’s been rising for the past two decades.

With an IHT rate of 40%, nearly £19 billion in assets, beyond various exemptions and reliefs, were taxed[4]. The taxman might become the largest single beneficiary if multiple family members inherit. Given the current higher interest rates, the compounding effect of reinvested income can grow wealth even further. Therefore, financial planning is about reducing the size of estates and preventing them from growing too large.

Financial planning and gifting

Using surplus pension and investment income, for example, to help towards grandchildren’s school fees both invests in their future and reduces the growth rate of the estate. The notion of IHT planning may conjure images of esoteric and inaccessible investment schemes, but straightforward gifting can be just as effective.

In addition to utilising various allowances and reliefs available, lump-sum gifts to an individual, known as Potentially Exempt Transfers, will not be subject to IHT if you live for seven years after making the gift. If you die before then, these gifts are initially set against the available nil rate bands, so they may still be tax-free. Lump-sum gifts could be a valuable way to help a grandchild working to be a first-time buyer get a decent deposit together. The average gift for a house deposit is £25,000.

Creating a financial plan

However, for many – possibly the majority – the fear of running out of income and capital mentally eclipses the huge benefits of helping younger generations now, providing the enjoyment of seeing the positive impact on their lives. Creating a financial plan will provide the knowledge and reassurance of knowing you are financially secure, whatever the future may hold. This, in turn, will enable you to consider gifting from income and capital.

An inbuilt reluctance to discuss money matters with family members can lead to poorer long-term financial decisions and more money lost to the taxman. A lack of dialogue will also mean less influence over the choices made for you if you lose capacity – simply because your children might not know what you want to happen. Financial openness across generations is the starting point.

Source data:
[1] Schoolfeeschecker, accessed April 2024,
[2] Schoolguide, accessed April 2024.
[3] www.carehome.co.uk/advice
[4] https://britishbusinessexcellenceawards.co.uk/from-the-awards/inheritance-tax-receipts-reach-a-record-breaking-7-5

However, the ‘hard stop’ retirement is anticipated to diminish considerably in the future. Only 15% of UK adults believe it will represent most people’s experience in the next 10-25 years, indicating a paradigm shift in how future generations envision their retirement.

Changing retirement trends

The most notable shift between past and future retirement perceptions is a substantial increase in individuals never fully retiring because they want or need to continue working. Currently, 41% of UK adults expect this to be the norm in the next 10-25 years, a significant rise from 13% in the past[1]. This change can be attributed to several factors, including increased life expectancy, the rising cost of living and the desire to stay mentally and physically active.

Research focusing on hopes versus expectations of transitioning to retirement reveals that 44% hope for a ‘hard stop’, 47% hope for a transition period and just 9% hope to keep working. However, the expectations paint a different picture.

Planning for retirement

Only 30% expect a ‘hard stop’, 46% anticipate a transition period and 24% foresee continuing to work. Among those yet to retire who hope for a hard stop, only 52% realistically expect to achieve this, and one in five (19%) believe they will need to keep working. This divergence between hope and reality underscores the complexity of planning for retirement in today’s economic climate.

The concept of a ‘hard stop’ retirement has been replaced mainly by those looking to gradually reduce their working hours, combining part-time work with pensions to supplement their income. This approach allows retirees to maintain a sense of purpose and social connections while easing into retirement. While gradual transition remains popular, our research indicates a significant shift, with more people expecting to work indefinitely. This trend is expected to be driven by financial necessity and personal preference.

Flexible, part-time and remote work

Technological advancements and the rise of the gig economy also play a role, providing opportunities for flexible, part-time and remote work that can be tailor-made to suit the needs of older workers. For instance, consulting roles, freelance opportunities and online businesses allow individuals to leverage their experience and skills without the constraints of traditional full-time employment.

Flexible work environments and savings strategies will need to support the evolving approach to retirement in the future. Many employers will need to consider adapting to flexible working hours, remote work options and phased retirement plans that align with the changing needs of their workforce. Policies must also adapt to allow individuals who wish or need to remain employed longer to do so comfortably. For example, extending the age limits for pension contributions and providing incentives for lifelong learning can help older workers remain competitive in the job market.

Boost retirement savings

Additionally, a concerted effort must be made to help people save more effectively for retirement. Financial education and planning services should be made more accessible to ensure individuals can make informed decisions about their retirement savings.
Millions of adults are currently off track with their savings and might have to delay retirement plans as a result. Addressing this issue will require strategic policy changes to boost retirement savings and provide adequate support for a flexible workforce. For example, increasing employer contributions to workplace pensions and offering tax advantages for personal savings plans could incentivise higher savings rates.

Source data:
[1] Phoenix Insights research conducted by Message House, carried out in January 2024 among 1,502 UK adults. Weighted to be nationally representative.

If you’re contemplating a return to work after a significant absence or considering a phased return, there are several factors to consider. Here, we will explore how ‘unretirement’ could impact your finances, including effects on your State Pension and workplace pensions, as well as potential tax implications.

What returning to work could mean for your pension

Unretiring can be an exciting prospect. Beyond financial considerations, returning to work can offer benefits such as mental stimulation and social interaction. Many individuals contemplating a phased approach to retirement express a desire to keep their minds active and connect to working life.

If you have already started drawing benefits from a workplace pension or the State Pension before returning to employment, there may be specific implications you need to consider.

State Pension considerations

What happens to my State Pension if I go back to work?

If you’ve reached the State Pension age, you should be able to continue claiming it even if you return to work. Conversely, if you haven’t yet reached State Pension age, working and paying National Insurance Contributions (NICs) could increase the amount of State Pension you receive. The State Pension age is 66, rising to 67 by 2028.

To claim any State Pension, you need at least ten qualifying years of NICs and 35 qualifying years to claim the full new State Pension[1]. A qualifying year is a tax year in which you have paid or been credited with enough NICs to count toward your State Pension. If you don’t yet have 35 qualifying years, working longer could boost this, thereby increasing the amount of State Pension you receive.

Can I defer my State Pension if I go back to work?

If you’ve previously claimed your State Pension, you can stop claiming and defer future payments. However, you can only do this once, and you must typically reside in the UK. The State Pension is not given automatically upon reaching the State Pension age; you must claim it.
The government will send you a letter at least two months before you reach State Pension age with details on how to claim. If you wish to defer your pension and haven’t yet claimed it, it will be deferred automatically until you take action. The government provides useful information on how deferring affects your State Pension, available on their website.

Workplace pension implications

Will I get a new workplace pension if I go back to work?

For those under the State Pension age, if you return to employment and earn more than £10,000 a year, you should be automatically enrolled in a workplace pension scheme. You’ll contribute to your pension, as will your employer, and may benefit from government tax relief, which varies based on individual circumstances.

People over the State Pension age

If you’re over State Pension age and return to work, you won’t be automatically enrolled in a workplace pension scheme. Nevertheless, you can opt in up to the age of 74, subject to your earnings[2]. You won’t get tax relief on pension contributions once you’re over 75, although employer contributions might still apply if they choose to do so.

Returning to a previous employer

If you return to a former employer where you had previously contributed to a pension, you might be able to resume contributions to the same pension pot. However, there’s a chance you may need to start a new pot as if you were a new employee. It’s advisable to check with your employer regarding their policies for returning employees.

Potential loss of benefits

Returning to work might affect certain pension benefits, such as a protected pension age. This is when the age at which you can take benefits from your pension is fixed or ‘protected’, even if it’s lower than the Normal Minimum Pension Age (NMPA), currently 55 but rising to 57 in April 2028[3].

Saving and withdrawing from existing pensions

Can I keep saving into or withdrawing from my existing pensions if I unretire?

If you return to work after retirement, you should be able to contribute to a workplace pension up to age 75. Your Annual Allowance permits a total contribution (employer and employee) of £60,000 per year across all pension plans before attracting an Annual Allowance charge[4]. As well as the annual allowance limit, your own tax-relievable contributions are limited to 100% of your annual earnings.

If you’ve already started withdrawing from your pension pots, you may have triggered the Money Purchase Annual Allowance (MPAA), reducing your Annual Allowance to £10,000 each tax year. Only income from a defined contribution (DC) pension affects the MPAA; income from a defined benefit (DB) pension does not trigger it. If you maximise the £10,000 into your DC pension, you can still accrue a pension input amount of up to £50,000 pa in your DB pension before incurring a charge, known as the Alternative Annual Allowance (plus any carry forward that you have available).

Tracking down lost pensions

It’s estimated that over £26.6 billion is sitting in lost and forgotten pension pots, with each pot in the 55 to 74-year-old age group averaging £16,000[5]. Before returning to work, consider tracking down any old pensions you may have. Uncovering these can provide a clearer picture of your financial situation and might influence your decision to unretire. You can search for lost pensions through the government’s Pensions Tracing Service.

Tax implications

What unretiring means for tax

If you’ve reached State Pension age, you’ll continue to pay Income Tax but will not pay NICs on your earnings. An exception is if you’re self-employed and pay Class 4 NICs, which stop at the end of the tax year in which you reach State Pension age. Not paying NICs could offer a significant financial incentive to return to work if you’re above this age threshold.

Your age does not affect whether you pay Income Tax; you’ll continue to pay it if your taxable income, including any private and State Pension income, exceeds your tax-free allowance. The annual standard Personal Allowance is £12,570 for the 2024/25 tax year. NICs must continue following tax rules for those below the State Pension age and returning to work.

Source data:
[1] The new State Pension. Data source, accessed February 2024.
[2] Automatic enrolment if you’re above State Pension age. Data source, MoneyHelper, accessed February 2024.
[3] Increasing Normal Minimum Pension Age. Data source, GOV.UK, 4 November 2021.
[4] Tax on your private pension contributions. Data source, GOV.UK, accessed February 2024.
[5] Lost pensions 2022: what’s the scale and impact? Data source, Pensions Policy Institute, October 2022.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

This trend highlights a significant shift in retirement planning behaviours, where immediate financial needs or desires often outweigh the long-term benefits of leaving pension funds untouched. Factors such as unexpected medical expenses, the desire to pay off debts or the need for additional income to support a particular lifestyle can drive retirees to access their pension savings earlier than planned.

Consider the timing of pension withdrawals

The implications of early withdrawals are multi-faceted and can significantly impact retirees’ financial security. By withdrawing funds early, retirees potentially miss out on the compound growth that could have been achieved if the money had remained invested. This can result in a smaller pension pot during the later years of retirement when the need for financial stability is often greater.

Furthermore, early withdrawals may indicate insufficient financial planning or awareness about the benefits of delaying pension access. As people live longer and retirement periods extend, it becomes increasingly important for individuals to carefully consider the timing of their pension withdrawals to ensure they stay within their savings.

Financial impact of early withdrawals

The data revealed that the average amount an individual withdraws by age 65 is £47,000. Financial modelling shows how much that £47,000 could grow if invested for longer. If the money stayed invested from age 55 (when the member would have first been able to take benefits) for an additional five years, they would have £13,925 more on average by the time they reach 60.

That figure rises to £24,661 if it were to stay invested for ten years to age 65 – a rise of more than 50%; and to more than £38,000 if invested to age 70. A separate modelling exercise was conducted assuming that individuals claimed the maximum tax-free cash available at age 55, which currently stands at 25%, equivalent to £11,750.

Maximising pension benefits

If the same modelling were run with the remaining £32,250 left in individuals’ pots after taking the tax-free cash, savers would, on average, be £10,441 better off after five years and £18,496 after ten years if they decided to stay invested. These figures highlight the significant financial benefits of delaying withdrawals and allowing pension funds to grow.

The data further shows that most people withdraw money from their workplace pension before retirement age. While early withdrawals are often unavoidable, draining a pension pot too soon can carry substantial risks, which providers and retirees should be aware of and take steps to guard against where possible.

Navigating a changing pensions landscape

The pension landscape is ever-changing. People are living longer, which means pensions must cover longer retirements. Additionally, more individuals are choosing to phase into retirement with part-time work, changing how and when they access their pension funds.
Early withdrawals can severely impact the long-term financial stability of retirees. Therefore, individuals must seek professional financial advice to make informed decisions about their pension pots.

Planning for a secure retirement

Retirees should also consider other sources of income and investments that can support them during their retirement years. Diversifying income streams can provide a safety net and reduce the need to dip into pension funds prematurely.

Proper financial planning ensures that retirees can maintain their desired lifestyle without compromising their financial security. By understanding the implications of early withdrawals and exploring alternatives, retirees can make decisions that will benefit them in the long run.

Source data:
[1] The statistics cited were the result of an analysis by Scottish Widows on 232,654 different retirement claim transactions between 2019 and 2023, which has been used from different sources to give a single view.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

Your contributions will generally benefit from tax relief, although how this works depends on your circumstances and the scheme you contribute to. The value of any tax benefit is also contingent on your situation. If you’re paying into a workplace pension, your employer will also contribute.

Accessing your pension pot

You can access your pension pot starting at age 55, though this age will increase to 57 in April 2028. Exceptions apply, for instance, in cases of ill health[1]. It’s important to remember that the age at which you can access your State Pension is higher compared to personal or workplace pensions.

Why consider increasing your contributions?

Increasing your pension contributions could significantly boost your savings, potentially enhancing your standard of living in retirement. The Pension and Lifetime Savings Association suggests that a single-person household outside of London needs £31,302.40 a year for a moderate retirement lifestyle[2]. This comprises the full State Pension of £11,502.40 a year for the 2024/25 tax year plus £19,800 a year from personal pension savings.

Getting back on track

If you’ve realised that your savings are not on track and can afford to do so, increasing your contributions will potentially give you more time to get back on course. Remember, contributing to a pension can be tax-efficient as well. In a workplace pension, some employers might offer enhanced contributions you can use. We’ll delve deeper into this later.

Is increasing contributions right for you?

Deciding whether to increase your pension contributions is a personal decision that hinges on your circumstances. Consider your other financial priorities, such as paying off debts, a mortgage or building an emergency fund. Once you’ve reviewed your outgoings and anticipated future expenses, you’ll have a clearer idea of whether increasing your pension contributions is feasible.

Ways to boost your pension contributions

We can advise how to increase your pension contributions by updating your online pension account or speaking to your employer or pension provider.

Here are some steps to consider:

Make the most of employer contributions

In some workplace pension schemes, employers will increase their contribution to your pension pot when you do. They may even match your contributions up to a certain amount. If this is an option for you, it could be an easy way to augment your pension pot with minimal extra effort from you.

Consider salary sacrifice

Check whether your employer offers ‘salary sacrifice’. Instead of making personal contributions directly, your gross salary is reduced (‘sacrificed’) and, in return, your employer increases their pension contribution by at least the same amount. You don’t pay Income Tax or National Insurance contributions (NICs) on the sacrificed amount.

Depending on the structure of the salary sacrifice arrangement, your employer’s pension contribution could be increased by some or all of the savings in NICs. It’s a complex subject, but your employer can explain how it works for you if offered.

If you finish paying off a purchase

If you’ve been comfortably making regular repayments on a loan, car or holiday, consider redirecting that money into your pension once the repayments are complete. If you’re not missing the extra income in your bank account, it might be easy to save more without noticing.

Pay In lump sums

If you come into extra money, such as from a bonus, gift or inheritance, consider investing some or all of it into your pension pot. If the lump sum is substantial, remember the Annual Allowance, which is the total amount that can be paid into your pension each tax year without suffering a tax charge. The current Annual Allowance is £60,000 (2024/25). However, ‘carry forward’ rules may allow you to pay more before being taxed. Your own tax-relievable contributions can’t exceed 100% of your annual earnings.

Generate additional income

If you need to boost your retirement savings, consider generating additional income through side hustles or converting your skills into earnings. Ensure you check your employment contract to avoid breaching any regulations that could impact your main job.

Now that you’ve explored ways to increase your pension contributions and why you might consider doing so, setting goals to help you save towards the retirement you envision could be a wise next step.

Source data:
[1] When can I take money from my pension? Data source, MoneyHelper. Accessed February 2024.
[2] Retirement Living Standards. Data source, Pension and Lifetime Savings Association. Accessed February 2024.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.