If you’re one of the growing number of people who want to work part-time after retirement age, it’s worth considering how the move could affect your pension payments and tax liability.

Although pension planning is about retirement, there is no actual link between not working and receiving pension income.

You can take pension benefits from a workplace pension and/or self-invested personal pension (SIPP) at any time from age 55 and continue to receive a salary as well.

The state pension is linked to your state pension age, which is dependent on your date of birth. It’s paid regardless of whether you have continuing earnings.

CAN I RECEIVE A SALARY AND PENSION FROM THE SAME EMPLOYER?

There’s no legal barrier to taking pension benefits while working for the company which pays your pension.

Your employer will set a ‘normal retirement age’ for their workplace scheme, but you’re not obliged to stop work at that point unless you’re unfit to carry out your duties.

However, Fiona Tait, technical director at Intelligent Pensions, says if you’ve opted to take your pension it’s likely that your employment contract will have to be re-negotiated. ‘In some cases this may include taking reduced benefits from the company pension scheme,’ she says.

If you start working with another employer, this would not affect your entitlement to your existing pension.

WHAT ARE THE TAX IMPLICATIONS?

Your total earnings, which include pension payments other than your initial 25% tax-free lump sum, are subject to income tax.

The more pension income you take on top of earnings, the more tax you’ll pay. It’s possible your pension payments will put you in a higher income tax threshold, which means you’ll pay tax at an increased rate.

John Lawson, head of financial research at Aviva, says one way to withdraw money tax-efficiently is to take your 25% tax-free lump sum in regular amounts.

‘This allows you to have a part of your income which is not taxable. For example, if your tax-free lump sum was £25,000, you could draw £500 a month for 50 months (i.e. more than four years) to supplement earned income,’ he explains. It is worth noting that this flexible feature may not be available on all SIPP investment platforms.

Once you exceed the state pension age you’ll no longer have National Insurance contributions deducted from your salary.

CAN I MAKE FURTHER PENSION CONTRIBUTIONS?

You can continue to make pension contributions so long as you have UK earnings, but the extent to which you’ll receive tax relief could be limited.

If you’re withdrawing income from a defined contribution (DC) pension plan using flexible access drawdown or via Uncrystallised Fund Pension Lump Sums, any contributions above £4,000 a year would be subject to the Money Purchase Annual Allowance (MPAA) tax charge.

‘Basically this means if you withdraw income directly from a personal pension plan, SIPP or workplace pension, which is not a final salary arrangement, it is advisable to restrict any ongoing contributions to this (£4,000) level,’ advises Tait.

HOW CAN I AVOID TRIGGERING THE MPAA?

You can avoid triggering the MPAA by only withdrawing the 25% tax-free lump sum from your pension.

Additionally, if you have more than one pension plan and one of them is a final salary/defined benefit (DB) scheme, you could take your income from the DB scheme and leave your DC pension untouched until later.

‘This would avoid triggering the MPAA and you would still be able to contribute up to £40,000 a year (to your DC pension) including full tax relief. This would help you to replace some of the pension income you are taking in the early stages of your retirement,’ says Tait.

Some people are eligible to take their entire pension as a cash lump sum if it’s worth £10,000 or less. This would not trigger the MPAA.

It’s possible to take up to three pots this way with a combined value of £30,000. With each lump sum you would get 25% tax-free and the remaining 75% is taxed as income.

If you were already in ‘capped drawdown’ before 6 April 2015 you won’t be subject to the MPAA.

HOW CAN I INVEST MORE THAN £4,000 A YEAR?

Rachel Smith, associate consultant team manager at pension specialist Mattioli Woods, says investing in ISAs is a good alternative to making pension contributions if you’re worried about exceeding the MPAA.

You can invest £20,000 each year across the range of ISAs and all the income and capital gains generated will be tax-free. You can also withdraw money tax-free.

Smith says investors with a higher-risk appetite could consider investing in venture capital trusts (VCTs). New VCT offers provide 30% tax relief as long as you hold the shares for five years.

SHOULD I DEFER TAKING PENSION BENEFITS?

Apart from minimising tax and avoiding the MPAA trigger, deferring your pension income has other advantages.

Your funds can continue to grow within a tax-efficient wrapper, potentially resulting in a larger income in the future.

Smith says if someone has a fund worth £100,000 that achieves growth at 4%; that fund could support an income of £5,000 a year for 21 years. If the same fund had no income drawn from it for the first five years, it could support an income of £8,200 a year – that’s a 64% difference.

If you don’t exhaust your pension pot, you can pass it on to your beneficiaries free from inheritance tax.

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