Returning to work after retiring? What you need to know for your pension

By the time you’ve reached retirement age, you’ve likely learned that life often doesn’t go as planned. And in this case, it might mean returning to work after you thought you’d thrown in the towel for good.  

You may have returned for a bit of extra cash, or just because you were missing the hustle and bustle. But if you weren’t accounting for the change, it could put a wrench in your pension plans and mean you need to be careful about how you move forward to maximise your money and avoid any tax surprises. Here’s what you need to know, depending on what you’ve done with your pension so far.  

If you’ve taken your taxable income from your pension

What you can pay into your pensions might reduce once you’ve taken a flexible income payment  from your pot.  This includes taxable drawdown income, or an Uncrystallised Funds Pension Lump Sum (UFPLS) which is part tax-free, part taxable. lump sum where 25% of the value is tax-free, and 75% would be taxable.  If you want to make pension contributions after you’ve taken a flexible payment, you will be limited to £10,000 per year instead of the £60,000 limit many workers may have had before. This reduced amount is called the money purchase annual allowance and if you or your employer pay more than this into defined contribution plans like SIPPs, you’ll face a tax charge.

Most people that choose to purchase an annuity with their pension after any tax-free lump sum or those who have not yet taken a taxable income payment from their drawdown pot will not be held to this £10,000 limit. The lower limit does not apply to contributions into defined benefit schemes.

Watch out for pension recycling rules

If you take over £7,500 of tax-free cash out of your pensions over the course of 12 months to deliberately repay some of it into your pension, you might fall foul of HMRC’s pension recycling rules. So, if you’ve taken some tax-free cash, you’ll need to be careful about starting your contributions again.  

If your pension contributions are far above what they used to be, and those extra cumulative contributions exceed 30% of your tax-free lump sum over a five-year period, you could find yourself in violation of these rules. But the onus is on HMRC to prove that you deliberately planned to recycle your tax-free lump sum and get extra tax relief.

Take advantage of free cash

The obstacles we’ve described here might make those returning to work a bit hesitant about restarting your pension contributions when you’ve already accessed your pot. But restarting in most cases will come with the benefit of employer contribution and mean more money in your pension pot in the long run. If you are over state pension age, you won’t automatically be enrolled in your company’s pension programme, but you can request it. If you’re doing contract work or part-time roles, take a look at your contract to see what pension options are available to you.  

In addition, for those who are returning to a job with a defined benefit scheme, you could be able to benefit from continuous service if you were only gone for a short period of time. This means that the time you were not working would still be counted in your defined benefit scheme in the future.  

What does this mean for your state pension?  

Once you’ve reached state pension age (which is gradually rising to 67 by April 2028), you can claim any state pension income regardless of your employment status. However, if you’re still working and in a financial place to delay or pause the state pension, this could get you larger payments down the line.  

Those who reached state pension age after 2016 can start to get an extra 1% added to their state pension payments for the rest of their life every nine weeks they decide to defer. So, if you defer your state pension for a year, you’d receive around an extra 5.8%. This could increase someone's yearly state pension income from £12,547.60 to £13,275.36 if they are getting the full state pension.  

It’s worth doing the sums on if this is the right path for you, as HMRC estimates it will take more than 15 years for the deferred payment to leave you better off than taking the state pension as soon as you can. Where it can be beneficial depends on the rate your income is being taxed. If state pension payments are bumping you into a higher tax bracket and you won’t be facing this same income tax rate down the line when you’re no longer working, deferring could be helpful.  

Returning to work after poor health

If you’re returning to work after accessing your pension early for ill health, there may be further limitations on what you can do with your pension now and any income might have to stop. These will be dependent on a variety of factors, including the rules of your specific pension plan. To find out more details for your scenario, your employer may have guidelines or you can refer to HMRC’s early retirement page.