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USA Why the over-65s are returning to the workforce - and possible pension tax traps
Labour market data that the ONS drilled down into this week, suggested that the over-65s are returning to work in large numbers. In April to June 2022, the number of people aged 65 years and over in employment increased by a record 173,000 on the quarter to 1.468 million, which is also a record level. Is this the end of the early retirement dream that lured many older workers during the pandemic and its lockdowns?
Gary Smith, Financial Planning Director at wealth manager Evelyn Partners, suggests some probable reasons behind the return of retirees to the workforce - and a couple of possible pension taxation traps that such boomerang workers should be aware of.
Why are the over-65s returning to work?
- Unrealistic pandemic budgets. During lockdown restrictions peoples’ expenditure plunged as leisure opportunities disappeared or were restricted for a significant period of time. As we travelled less or not at all vehicle usage reduced and this added to older workers’ feeling that they could afford to retire, with a somewhat illusory picture of expenditure levels. However, the cost of living has rocketed, particularly in many areas that take up a lot of retirees budgets (energy, motoring, travel, groceries) and this is coupled with the opportunity to go on overseas holidays and out for meals again. Expenditure for many will have soared during the last 12 months. Added to this, people often underestimate how much they will spend in retirement as all that free time can mean discretionary spending increases, even without inflation.
- Investment performance. Most pension funds will have fallen in value and this will make many savers feel that they have no other option than to return to work to assist in meeting their increased costs, allowing their pension funds time to recover. In combination with point 1., many retirees will be getting a scare that their pot will not last for as many years of retirement as they had anticipated.
- Brain drain. What we have seen, specifically in the public sector, is that high earners (typically senior NHS staff, GPs and head teachers) have chosen to retire to avoid / reduce annual allowance and lifetime allowance tax charges within their pension benefits. This has resulted in a shortfall in certain positions within these sectors (GPs being a prime example), which in turn will tempt others to return to work – particularly if they feel their own retirement savings need a boost.
- Boredom. Many people had a dream about their retirement lifestyle during the pandemic, but the reality is often vastly different, and once the garden has been dealt with and those jobs that had been put off have been completed, some people actually find it hard to fill their days.
Possible tax implications
- a) For those who do return to work, care must be taken in respect of future pension funding, as they might have triggered the Money Purchase Annual Allowance, which will restrict any future pension funding to £4,000 per tax-year. This could be an issue if they join their new employer pension scheme as, based upon contribution rates of 8%, a salary of over £50,000 would result in contributions exceeding £4,000 per tax-year, and the individual would be personally taxed on any excess above £4,000.
- b) Some people historically were able to apply for fixed lifetime allowance protection which locked in a higher legacy level of LTA. Going back to work and making pension contributions will mean they could lose their fixed protection and be subject to the standard lifetime allowance of £1,073,100 instead of a higher LTA they secured in the past. Whether this is an overall financial negative would be for the individual or their financial planner to clarify, but certainly something to bear in mind.