You need to know about this tax trap if you’re returning to work after retiring

Posted on

The latest figures suggest that thousands of retired people are returning to work. If you’re thinking about doing the same, you need to be aware of the Money Purchase Annual Allowance (MPAA).

Figures from Royal London suggest that some people that retired during the pandemic have returned to work in some way. The number of people aged between 50 and 64 that are “economically inactive” fell by 84,000 in the three months to October 2022.

There are many reasons why someone may choose to return to work. It may have been part of their plan after taking an initial break, or some may find they missed the structure that work provides. High inflation over the last year is likely to have played a role in the decision for many too, as the cost of living has significantly increased.

There are different ways to return to work as well. While some may have returned to a similar full-time position they held before, others may be working part-time, be self-employed, or even running their own business.

One of the potential long-term benefits of returning to work is that it could provide an opportunity to boost your pension savings and the income you receive when you retire. However, the MPAA could limit how much you’re able to tax-efficiently save through a pension.

The amount you could tax-efficiently save into your pension could fall to just £10,000

When you save into a pension, the government provides tax relief, which boosts your savings. This makes pensions a tax-efficient way to save for retirement.

There is a limit on how much you can save without suffering a tax charge. For many people, the Annual Allowance is up to £40,000 each tax year, up to 100% of their annual earnings. However, if you have already taken a flexible income from your pension, this falls significantly to just £10,000 under the MPAA (as of the 2023/24 tax year).

It could mean you can’t tax-efficiently contribute as much to your pension as you first believe. If you’ve returned to work to increase your financial security or income later in life, the MPAA could harm your long-term plans.

As pension contributions are typically invested to deliver returns over the long term, the impact of a lower Annual Allowance for your projected retirement income could also be more than you think.

If you’re affected by the MPAA it’s important to understand how your contributions will add up and what it means for your financial future.

While you can usually carry forward any unused Annual Allowance for up to three years, this isn’t normally the case if you’re subject to the MPAA. So, if you want to save as much as possible through your pension after returning to work, making regular contributions and using the full MPAA each year could make sense.

You may be able to withdraw some money from your pension without triggering the MPAA. This includes taking small pension pots, usually defined as less than £10,000, and taking up to 25% of your pension as a tax-free lump sum.

So, if you want to take some time away from work but intend to return, considering these options could mean you can still benefit from a higher Annual Allowance in the future.

If you will be taking lump sums from your pension, remember to consider the long-term effects. Taking part of your savings now could mean you have less when you retire and are at risk of running out of money during your lifetime. We can work with you to understand how taking a lump sum from your pension now could affect your long-term finances.

Exceeding the Money Purchase Annual Allowance could result in an unexpected tax bill

If you exceed the MPAA, you will get a tax charge on any pension contributions that exceed it, this includes contributions you make and those made on your behalf, such as those made by your employer.

Understanding how much you could be charged can be complex and will depend on when you first accessed your pension. However, it could reduce how much you have for retirement and may affect whether saving into a pension is the right decision for you.

We can help you calculate a potential tax charge and review your alternative options to get the most out of your money if the MPAA could affect you.

Update your financial plan if you’re returning to work

If you’re returning to work after taking time off, updating your financial plan could help keep you on track and make the most out of your money.

A tailored financial plan can identify potential opportunities, help you understand your tax liability, and set out the steps you need to take to reach your goals. Please contact us to talk about your plans.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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.

 

We aim to keep our clients up to date on interesting and relevant financial news.

You can sign-up to receive our monthly newsletter by email, even if you’re not yet a client. Sign-up using the form below.

Client testimonials

I have always found Black Swan to be caring and understanding of my quirky lifestyle. I always feel they try to get me the best returns while respecting my current needs.

Sally Muir

A client since 2011

We would be very happy to recommend the support and service we receive.

Valerie Locks

A client since 2010

I have always been completely useless regarding finance - thankfully our financial adviser is not! I've retired with far more than I ever expected and investments continue to grow safely. So - thank you!

Bernadette Jane Warner

A client since 2000

Very happy with the professional service I have received and feel a lot happier now with my finances put in order.

Martin Field

A client since 2011

Julie Cooper was recommended to me by a work colleague. She has been very helpful, professional and has explained everything well. I would definitely recommend her services to anyone else who are interested in a financial review.

Steven Rooke

A client since 2018

…Service has been first class.

Hugh Fells

A client since 2012

My face to face meetings with Rob Young and Jessica Lyons have always been very open and understandable. My questions have been answered clearly and I have left feeling that my financial matters are in good hands.

Sandra Jack

A client since 2000

[A] safe pair of hands in a complex financial world.

Gary Middlehurst

A client since 2003

A reliable company with good communication skills and good knowledge of the financial markets.

Alan Evetts

A client since 2014

Maureen Pembridge is a long-time trusted advisor to our family. The market might fluctuate but her attention to detail is consistent.

Linda Burnard

A client since 2000

I am pleased to recommend Julie as a trustworthy financial advisor. She explains financial jargon in plain language, and always listens carefully to my particular financial needs and has helped me make the best of my savings.

Carolann Samuels

A client since 2010

I have always been satisfied with the way that Black Swan has handled my account. And I have always found the staff very helpful whenever I need to call the office.

Robert Anthony Matthews

A client since 2012

An excellent personal service from a person I know and trust.

Michael Dalton

A client since 2010

I am getting a very good services from Black Swan, they have got my investments sorted out which was in a bit of a mess.

Roy Jakens

A client since 2012

A good, efficient team providing clear ideas to shape a winning strategy.

Adrian Michael Levenstein

A client since 2011

Black Swan is a company to be trusted, with friendly staff and professional advisors.

David Brian Jennings

A client since 2017

I have been with Black Swan for many years. I have never wished to change anything. They give a good straight forward service.

Martin Barrett Brooks

A client since 2010

Andy Peters has been invaluable in firstly combining several pension pots and then giving excellent investment advice. It has given us a great deal of comfort to know that our financial affairs are in such good hands.

James Guillum Scott

A client since 2014

I find my financial advisor easy to talk to and feel that she understands my lifestyle. She is always available for help when I need her and explains in words that I can understand.

Margaret Ena Glasgow

A client since 2000

Andy is a first rate Director, excellent communicator and leader.

Ross Perry

A client since

Black Swan Financial Planning and Andrew in particular, are very clever at working out how risk averse we are, and coming up with solutions that we feel comfortable with. We are happy in the knowledge that we can continue to enjoy a comfortable retirement. Andrew Peters is a very, very friendly person who is great to chat to and easy to deal with. He explains things very clearly in layman’s terms, and if we still don’t understand, he explains it until we do!

Alan & Jane Dyer

Clients since 2012

We have always found Rob [Young] to be very approachable and knowledgeable. We have every confidence in the advice given and feel comfortable with the decisions we’ve made. There are certain opportunities that we wouldn’t have known about if Rob hadn’t brought them to light, which makes the advice good value for money as far as we’re concerned.

Peter & Pauline O’Halloran

Clients since 2013

Rob [Young] is extremely knowledgeable. I knew nothing about the different types of trusts which will not only secure my income in retirement, but also leave a legacy for my children. I’m glad that I sought his advice when I did.

Sarah Wilson

A client since 2015

I am extremely happy with the service afforded to me by the company and my adviser Julie Cooper.

Geoff Coxell

A client since 2010

My wife and myself have been dealing with Black Swan for a number of years. We have met with different representatives from the company over the years and have found all very helpful in their own way. We met with James [Anderson] a few years ago and found him very helpful and knowledgeable. He keeps in contact with us on a regular basis. We find the Company information very helpful and we feel very secure with our finances.

Andrew Kirchen

A client since 2015

I have always found my adviser to be easy to contact, very professional in his approach, yet friendly and understanding. I have a sense of an experienced company behind him, really on the ball financially and with good standards.

B McBean

A client since 2011

Partner with the most reliable and experienced team of advisers

Enter your details & we'll be in touch to discuss your needs.
Alternatively, contact us directly and speak to a member of the team.

    Subscribe to our newsletter