Returning to the workforce may not be as attractive as the Chancellor of the Exchequer may envision it, affected as it is by pensions policy, says Caitlin Southall, Pension Technical Manager, Curtis Banks.
In recent weeks, we have seen a reemergence of a political rhetoric that older people should return to the workforce. Jeremy Hunt referenced this notion back at the start of the year when it was reported that there were approximately 500,000 fewer people in employment compared with before the pandemic. Mel Stride, the Work and Pensions Secretary has echoed this sentiment, stating that older people should consider working as food delivery drivers or suchlike jobs which offer seemingly ‘flexible’ working patterns and conditions.
Recent statistics from the Department of Work and Pensions show that there was an increase in people aged 50-64 in employment, albeit it was a modest increase of only 0.6%.
But returning to the workforce presents some additional considerations when it comes to pensions. It is logical to look first at the Money Purchase Annual Allowance (MPAA). The MPAA is a variation of the annual allowance regulations introduced as part of the pension freedoms,and acts to effectively limit the amount of tax relief that can be obtained on contributions into a pension and affects all money purchase schemes held by the client. There are certain trigger events for the MPAA, including taking income from a flexi-access drawdown fund, being in flexible drawdown before 6 April 2016, or taking an uncrystallised funds pension lump sum (UFPLS). The MPAA for 2023/2024 is £10,000, following an increase from £4,000 as part of Jeremy Hunt’s Spring Budget. It’s important to remember that the MPAA is an allowance within an allowance and tied to the annual allowance. It is possible to access pension benefits without triggering the MPAA, although advice from a financial adviser would prove extremely valuable if the client expects to return to work at any point post accessing their fund.
The impact of the MPAA on those returning to the workforce has the potential to be very prohibitive. When the MPAA is triggered, clients can still claim tax relief on the contributions, however an annual allowance tax charge would be payable if the MPAA was exceeded, effectively removing the benefit of any reclaimed tax on these additional contributions. Clients combining pension income and earned income have the potential to be pushed into a higher tax bracket. For some of these clients, this may act as a deterrent to add further funds to their pension for either pension rebuild or accumulation purposes. It’s important to remember that the annual allowance charge could also be triggered when employer contributions are made to the pension.
For those returning to the workforce over and above the state pension age, they won’t pay employee national insurance on earned income, which provides an opportunity for increased pension contributions as they would receive a higher net income from their gross wages. Although this might be a modest amount dependent on salary, it is still an opportunity to add to their pension, subject to existing pension limits like the MPAA.
The tax position of clients returning to the workforce becomes slightly more complicated if they have already accessed their pension. If taxable income has already been drawn, clients may end up paying tax on pension income and earned income in the year that they return to work. This may not be problematic for some if they have only accessed monthly drawdown income, which principally can be turned off when the client returns to work. But what Jeremy Hunt’s call to arms for people to return the workforce doesn’t take into account is the impact that certain pension events or investment choices may have on a worker’s pension.
If a client has already purchased an annuity, they won’t be able to turn this income off. So they will continue to be taxed on both annuity income and their earned income. Additionally, what happens if a client has already taken benefits from a defined benefits scheme, which again you are typically unable to cease or pause? There are further question marks if a client has taken UFPLS, or an ad-hoc flexi-access withdrawal to cover a period of time or a specific financial event.
In all of these circumstances, the client may have more income for the year than is required, and therefore they will be paying more tax than they had intended. If they have made a withdrawal from the pension, and paid emergency tax, they may have submitted a P50, P53 or P55 to reclaim tax. Their tax code may have changed because their income for the year has increased beyond where they expected.
When it comes to pension investments, clients may have sold investments within the pension fund to create liquidity to provide income or tax-free cash. If the pension income is no longer required due to earned income, there may be a financial loss faced if those investments have increased in value, and the clients look to purchase these again via the pension. The funds that have been withdrawn may not have attracted investment gain either.
Those clients who are considering returning to work, following an initial retirement, will hopefully seek the advice of a financial adviser noting the various and complex tax implications involved.
Returning to the workforce for those that had already entered retirement might be the only option for some who financially need to supplement their pension income. However, in returning to work, there may be considerations for their pension that could have an impact on their options and fund size when they do finally retire, and they may incur an inadvertent increase in their overall tax liability. Hunt’s rallying cry is somewhat understandable, however unless the Government reviews the meagre MPAA amount further, or implements other tax allowances for those returning to work, his calls may fall on deaf ears.
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