Back to work to help bridge pension gap

Published on Friday 5 June 2009 20:47

Picture: Fiona Hanson/PA

SCOTTISH pensioners are turning to part-time work to save themselves from a poverty blighted retirement. Pensioners have suffered a triple whammy in recent months: their savings income has been decimated by rock bottom interest rates; stock market falls are eating into their pension funds and they continue to face an inflation rate far higher than that for other age groups, making it virtually impossible to enjoy a real rate of return from savings.

Add falling annuity rates to the reduced pension pots with which they are bought, and the difficulty of providing an income through a retirement of 20 years or more is crystal clear.

Many are attempting to circumvent the problem by continuing to work beyond their statutory retirement age, phasing their retirement by taking their pension benefits in instalments, or resuming work on a part-time basis once retired.

Research by the Help the Aged and Age Concern charity recently found that about two-thirds of over-50s fear having to work longer than they planned because of damage done to their pension savings. Des Hamilton, director of the Pensions Advisory Service, said it had seen a marked rise in calls this year from people worried about their diminished pension and what they can do about it.

Fortunately, pensions are more flexible than they used to be, meaning retirement no longer has to be a one-off “event”. Paul Goodwin, head of pensions marketing at Aviva (formerly Norwich Union), said the insurer had seen a rise in the number of people using the full range of retirement options open to them, such as working part-time and deferring annuity purchase. “For lots of people, retirement is not fixed, but a journey using all the assets available to them to provide an income for their retirement, including their physical ability to work,” he said.

“People deferring retirement are bridging the gap by drawing capital from assets such as savings and property.”

Anne Hendry (see case study) is just one of thousands of Scots using part-time work to make up for pension shortfalls. After all, a part-time job earning 5,000 a year produces the same income as many people get from an annuity bought with a 100,000 pension.

The extra income also means that, where possible, retirees can leave all or part of their pension pots invested for longer to recover from the battering of the past two years. The extra funds also help to compensate for the vital income lost when banks and building societies were forced to slash savings rates to all-time lows in response to plunging interest rates, said Tom Munro, director of Tom Munro Financial Solutions.

“Lost income can effectively be replaced through the part-time positions on offer and although not an option many would choose it has, nevertheless, become a necessity for many with the Bank of England committed to keeping interest rates low for the foreseeable future,” he said.

But there are two immediate problems with using part-time work to bolster cash flow. One is the availability of that work, particularly at a time of rising unemployment in which companies are trimming staff numbers wherever they can. Some companies are known for their relatively enlightened attitudes to older workers, most famously B&Q, but also Morrisons and Tesco. But these companies remain the exception to the rule and most firms are still reluctant to allow workers to continue past the statutory retirement age.

If the obstacle of finding work can be overcome, however, it is then essential to ensure that the income from it does not affect any means-tested benefits, such as pension credit.

For guidance on this, contact the Pension Service (0845 6060265 or visit www.thepensionservice.gov.uk).

And there are other tax implications for retirees working part-time to think about, warned Fiona McDonald, a partner at Pagan Osborne. “The income will be subject to income tax and the individual’s tax affairs should be reviewed at the end of the tax year to check any additional liabilities, or the possibility that too much income tax has been deducted.”

McDonald added that while part-time employment can sit comfortably alongside pension income, as a new source of income the tax code and rate of tax deducted may not be correct.

Part-time workers must use the self-assessment tax system to assess and report their tax position for each tax year. Where there is any change in circumstances, such as taking on part-time employment, it’s advisable to seek advice on lodging tax returns, if necessary, and to avoid being liable for interest on any tax due, said McDonald.

“It is also important to establish if the work is employment or self-employment as this will affect the tax position, particularly in relation to what expenses can be deducted.”