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Returning to work after you’ve retired

7 minute read

In this guide

We discuss what happens if you decide to return to work and you’re:

  • Already receiving the State Pension or you’re close to State Pension Age
  • Taking money from a pension but want to save into your new workplace pension scheme
  • Needing to top up your new salary with savings
  • Taking means-tested benefits

This guide is based on our understanding of the 2024/25 tax rules.

It’s not unheard of to retire, enjoy some time off, then decide to return to work. But what happens if you’re already receiving the State Pension or withdrawing money from your pension savings? Or perhaps you’re accessing means-tested benefits?

Here are some of the key things you need to consider if you’re contemplating a retirement U-turn.

  1. I’m already receiving the State Pension
    You can continue receiving the State Pension, but remember it’s counted as income and taxed in the same way as your earnings. Alternatively you can choose to stop it. This boosts how much you receive when it’s reinstated. But you can only do this once and you’ll need to contact the Department for Work and Pensions (DWP) – www.gov.uk/contact-pension-service. The date to stop payments can’t be in the past or more than four weeks in the future.

  2. I’m close to State Pension Age
    If you reach State Pension Age while working, you can choose to take it or defer it. If you take it, it’s counted as income and taxed in the same way as your earnings. If you defer, it will increase at the rate of 1% for every 9 weeks you defer, which is just under 5.8% a year. But bear in mind you’ll have missed out on the income along the way. No action is required to defer the State Pension since you have to apply for it in the first place.

  3. I want to start saving into my new workplace pension
    If you’re below State Pension Age and you’re earning more than £10,000 a year, you should be automatically enrolled into your workplace pension scheme. If you’ve reached State Pension Age you might not be automatically enrolled but you should be able to opt in until age 75. In fact, if you earn more than £6,240 a year, you have the right to join your workplace scheme.

    If you start saving into your workplace pension and you’ve already withdrawn savings from a personal or workplace pension scheme, there are implications – see point 4 below.

  4. I’ve already started taking money from my pension savings
    If you’ve taken more than your 25% tax free lump sum from your pension savings, you may have triggered the Money Purchase Annual Allowance (MPAA). This means the amount of money you can save into a defined contribution pension each year has reduced from £60,000 to £10,000. You can check if you’ve triggered it with your pension scheme. This won’t apply if you’re receiving money from a defined benefit (final salary) pension scheme.

  5. I want to stop taking money from my pension(s)
    Stopping payments can be a good idea if you don’t need the money. That’s because the ‘income’ counts towards your personal income tax allowance and could push you into a higher-rate tax bracket when added to your salary. And it should also mean you have more money saved when you decide to fully retire.

    If you're withdrawing pension savings from a defined contribution pension scheme (also known as a money purchase scheme) you should be able to reduce or stop your payments. This applies to personal pensions and income drawdown.

    However, if you're taking money from your workplace defined contribution scheme you may not be able to stop your payments. And you’re unlikely to be able to stop a lifetime annuity or a defined benefit (final salary) pension scheme. If this becomes a tax problem, you could save some of your salary into a pension so it’s not paid as income. But be careful of the Money Purchase Annual Allowance (see point 4 above).

  6. My new salary isn’t quite enough to live on
    If you need to top-up your salary, it’s fine to use your pension savings. However, if you have other savings, you might want use them instead.

    ISA savings are free of income tax and won’t count towards your personal income tax allowance. This means you don’t need to worry about tipping over into a higher-rate tax band, and you don’t need to declare this money on your tax return.

    Also, when you die, your beneficiaries won’t pay inheritance tax on pension savings, but they might on other savings and investments. So it can make sense to use them up first. If you die before age 75, your beneficiaries may not have to pay any income tax on your pension savings.

  7. Entitlement to benefits
    If you go back to work and you’ve been receiving benefits, your payments might be affected. For example:
    • Carer’s Allowance – if your average weekly earnings are more than £151 (after tax, National Insurance and expenses), you’ll no longer qualify.
    • Universal Credit, Pension Credit, or other means-tested benefits could be impacted. You should notify the Department for Work and Pensions or whichever department administers your benefit (such as your local authority).

Next steps
You’ve got several options when it comes to finding out more or seeking help - Expert advice and guidance (pensionbuddy.co.uk).

We strongly recommend you take advice from an adviser authorised by the Financial Conduct Authority (FCA) before making any big decisions about your pension.

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