Does the idea of never working again fill you with dread? Lots of people end up working after their official retirement. With a decent income and lower outgoings, you might still want to save into your pension even after you retire.
It might sound like a strange way round – to retire then add to your pension, but it is possible and comes with some benefits. When you’re considering still paying into your pension once you’re retired, there are things you need to know. We’ve got you covered, with information about:
- The rules about paying into a pension after retirement.
- Tax implications when you continue to pay into your pension fund.
- Benefits for your estate planning and inheritance tax.
How long can I keep paying into my pension for?
The easy answer is that you can pay into your pension right up until the day you die. It doesn’t matter if you’ve been taking monthly payments, have withdrawn a lump sum, or deferred taking your pension for a while.
What’s more, your employer is still required to pay into your works pension. Once you’re over 65, you won’t automatically be enrolled in your workplace scheme, but you can still request to opt into it.
You and your employer will both make contributions in line with the scheme’s rules and the 20% tax relief still applies, too. That relief is in place up to your 75th birthday, at which point you lose tax benefits of paying pension contributions.
Private pensions, that’s ones you’ve saved with outside of an employer scheme, can have different rules. You should be able to continue paying in until you’re 75 but check with your provider what their rules are.
What’s my tax situation when I pay into my pension after retirement?
There are some caveats to how you can continue your pension contributions. You need to think about the tax implications and the relief you can get. To get a full idea of how to optimise your taxes, speak with a financial adviser.
In general, here are the tax rules that you should know about when paying into your pension as you get older:
- You can still pay up to your annual salary, or £40,000, and receive tax relief on your contributions.
- Paying into your pension whilst not earning a wage after retirement means you get tax relief up to £3,600.
- Your pensions income doesn’t count towards your annual salary for your tax relief.
- You can still take out a lump sum of 25% of your pension tax-free and continue to pay into your scheme.
- Lump sums can still be paid in, up to your annual allowance for the year, even after you’ve retired.
Will I still pay national insurance contributions if I work after retirement?
Once you turn 65, you no longer pay national insurance. That’s unless you’re self-employed and choose to pay class 4 national insurance contributions, meaning your business earns over £9.500 profit per year.
You can choose to top up your national insurance contributions from previous years through Class 3 contributions. You can make payments even after you retire. You've usually got six years to pay extra for an earlier year. For example, you can top up your contributions for the year you turned 60 until you are 66 years old.
Once you've stopped paying national insurance, no one will force you to take your state pension. You won't technically be paying into it anymore, but the payment you receive will increase the longer you put off receiving it. Although not paying into it, you're growing your pension income.
How is inheritance tax affected by paying into my pension longer?
Most workplace and private pensions aren’t eligible to pay inheritance tax. Pension savings aren’t part of your estate, so you don’t have to worry about hitting your heirs’ inheritance tax thresholds.
You can take advantage of this rule easily and legally. Even if you start to take your pension monthly, you can continue to pay in up to your working salary to ensure there is cash available to someone after you die.
Who is that someone? You can’t leave your pension in your will, so you need to nominate a recipient with your pension company. Depending on your pension, your beneficiary can still receive a monthly payment, and they’d have to pay income tax on it.
What Are the Pros and Cons of Paying into a Pension After Retirement?
- Your tax relief is in place until you’re 75 so the government still effectively contributes to your savings.
- Employers still have to pay into your workplace pension if you opt-in, so it's not just your money going in if you still work.
- You can protect your cash from inheritance tax, saving your loved ones’ money if you will leave a significant estate.
- You'll need to be savvy with your tax affairs to make sure you're paying the right amount and claiming the proper relief.
- If you don’t continue working, you only get tax relief on £3,600 per year.
The Take Home
Just because you’re at pensionable age, doesn’t mean you have to sit back and relax. You can choose to keep working and keep building up your pension pot. It’s even possible to pay in a lump sum after your retirement, as long as it still meets the normal rules.
Even if you take a lump sum out of your pension or you start to take monthly payment, you can still keep adding to your pot. As long as you’re still working, the rules about tax relief still apply, until you’re 75. Without working, you can still put money into your pension, with some tax relief in place.
As well as having access to more significant sums when you do finally put yourself out to pasture, your heirs will thank you for access to your pension pot without dealing with inheritance tax, too.