I want to carry on working in retirement
- The rules around working beyond state pension age
- How to delay your pension if you carry on working
- What happens to your National Insurance contributions
- Tax rules on starting a business in retirement
The number of people who work beyond state pension age (currently 65 for men and 63 for women) is around 1.5 million (up from 753,000 in 1993 and set to rise steadily). Some keep working because they need the money, others because they enjoy their role and don’t want to stop abruptly.
Default pension age is no longer 65
Although most people retire when they reach state pension age, default retirement age in the UK was ended in 2011, so you no longer have to stop working at 65 if you don’t want to.
Some firms can still insist on a cut-off age but they have to be able to justify this objectively. Jobs that require a high level of physical fitness may fall into this category. Most employers will now discuss retirement as part of an annual review and reach an individual agreement with each employee.
Many people who carry on working for a few extra years switch from full-time to part-time. Two-thirds of those beyond state pension work on this basis.
Older workers don’t pay National Insurance
Once you reach state pension age, you are no longer obliged to pay National Insurance. If you carry on working for an employer, you should provide them with proof of your age (birth certificate, passport or certificate of age exception) and check that National Insurance contributions are no longer deducted from your pay.
If you are self-employed you can also stop paying National Insurance. You may still have some Class 4 contributions to make in the first year you turn 65.
Drawing a pension while you work
Once you reach state pension age, you can begin to receive your state pension even though you carry on working. It will be counted as income and is taxable in the same way as your earnings (and any savings income you receive). Confusingly, it is paid gross and any tax due is collected from other sources (either via PAYE or through a self-assessment tax return).
It is also possible to receive a private pension while you carry on working. The only restriction is that, if you are still saving for retirement you can’t pay into the same scheme you are receiving pension from. Private pension is also taxable income, normally paid net with tax deducted via PAYE.
Deferring your state pension
If you carry on working past state pension age, you may decide to put off claiming state pension until later. To compensate for postponing your pension you can take a lump sum (for those qualifying for it before 6 April 2016) or draw pension at a higher rate when you eventually claim it.
The increase is the equivalent of 10.4% extra pension for each year you defer, although this is falling to 5.8% for those that reach state retirement age on or after 6 April 2016. The lump sum is the value of the pension you would have been eligible to claim plus Bank of England base rate plus 2%.
Find out more in our guide to the state pension.
Deferring your private pension
Deferring an occupational pension is less financially advantageous, in that your entitlement may not increase to compensate you for 'lost' years. Scheme rules govern the point at which you stop accruing further pension and many defined benefit (final salary) schemes apply a pension age at which point you are expected to start claiming.
If you are in a defined contribution (money purchase) scheme, you might decide to put off buying an annuity, if that's your chosen option, in the hope of getting a higher rate (paid to those who are older) but this carries the risk that rates fall generally in the meanwhile. This is less of a problem if you opt for income drawdown and keep your money invested.
Starting your own business when you retire
Retirement offers many people the chance to stop working for an employer and set up a business of their own. Around 32% of those working beyond state pension age are self-employed, compared to just 13% of younger workers. The simplest form of self-employment is to be a sole trader. If your business is more complex or substantial you might establish a partnership or form a limited company.
Running a business can be extremely rewarding but it calls for careful planning. You will need to keep detailed records of your income and expenditure and account for your profits to HMRC. Some of the expenses you incur are tax deductible and any losses you make can be set against future years. An accountant or professional adviser might be helpful if you have no previous experience of running a business.
Find out more in our guide to tax for the self-employed.
- State pension explained - how the current system works
- Company pensions explained - how workplace schemes differ
- Call the Which? Money Helpline - for all your retirement queries
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