Expectations adjusted as more boost pension by working beyond retirement age

With many people forced to stay in work, our Personal Finance editor looks at how to maximise the benefits

MANY people dream of retiring early, but working past the state pension age is fast becoming the norm for Scottish pensioners faced with savings shortfalls and battling the effects of inflation.

With few signs of a brighter economic outlook, the number of people being forced to consider working past their planned retirement date is growing rapidly. One in three Scots due to retire this year has put those plans on ice, according to recent Prudential research, a fifth of whom have done so because they can't afford to quit.

And new Scottish Widows figures show that while the average Scot wants to retire at 62, they can expect to wait until they are 65, based on current pension savings.

But more and more people are reaching retirement and having to lower their expectations. The trend has accelerated as low interest rates and inflation have wiped out the savings income on which many retirees depend to supplement their pensions.

Add to that a decline in private pension savings, with final salary pensions disappearing and savings levels tumbling in recent years, then factor in rising longevity, and the growth in the number of pensioners in financial disarray is unsurprising.

Thousands of pensioners have been forced back into work, or to continue working past the state pension age, in an attempt to fill the growing shortfall between their pensions and the income they need in retirement. The average age of retirement for men hit 64.7 years last year, up from 63 in 1996, according to the Office for National Statistics. For women the average rose from 60.6 to 62.5 years over the same period (the official retirement age for women began rising last year and will reach 65 by 2020).

As more people in their late sixties look for work, it will become harder to find, particularly in the current economic environment, although it was made easier when the default retirement age was scrapped in April this year.

Some companies are more enlightened than others when it comes to taking on new employees beyond the pension age, with famous examples including B&Q, Tesco and direct-selling firms. The Direct Selling Association (DSA) has reported a 29 per cent spike in the number of over-50s working for its members. There are about 120,000 people over 50 in the direct selling industry, the DSA estimates, up from 93,000 in 2009-10.

But there are several other factors to think about if you're working past your pension age, including your private and state pension, other savings and any implications for tax and benefits. Here are some key pointers:

• Income from work in retirement is taxable if your overall income (including that from work, savings and pensions) exceeds your tax-free allowance (currently 9,940). Working part-time will, for many, mean using the tax self-assessment system to report their tax position each year. And as many pensioners have discovered to their cost over the past year, there can be complications with tax codes. The income from work may mean your tax code changes, so keep HM Revenue & Customs informed of any changes in circumstances to ensure you're not asked to repay tax at a later date.

• Earnings could affect income-linked benefits to which you're entitled, such as pension credit and council tax benefit. For more on how your income will impact on benefits, contact the pension service on 0845 6060265 or visit www.thepensionservice.gov.uk.

• Post-pension age earnings can help boost your eventual retirement income further by allowing you to defer drawing your state pension. For every five weeks after your pension age that you delay taking it, your weekly pension rises by 1 per cent. Defer for at least 12 consecutive months and you qualify for a lump sum (plus interest of the base rate plus 2 per cent). You can get a projection of your state pension at www. direct.gov.uk/en/Pensionsandretirementplanning/StatePension/DG_184319 or by contacting the state pension forecasting team on 0845 3000 168.

• Earning a regular income may enable you to leave your pension invested for longer, giving it a chance to recover from losses incurred during the downturn and finding no inflation-beating options in the savings market. One option is to leave your pension invested and take cash out in tranches, using phased drawdown.

"This might help if you are still working and this tax-free amount from your pension does not get added to your income," said Gregor Munro, investment adviser at Johnston Carmichael.

"Once the lump sum is expended and/or you stop working or need more income, you can start income drawdown or buy an annuity."

But this option isn't for everyone, given the risk of volatility hitting the money still invested - make sure you have sufficient non-pension income to absorb any losses.

• The 25 per cent tax-free lump sum you can take from your pension after age 55 can be used in a similar way, bridging the gap between income and expenditure for those who are taking a drop in income because they have reduced their working hours, or taken another job at a lower rate of pay.

Paul Lothian, chartered financial planner at Verus Financial Planning in Dundee, said: "Where such a lump sum is not required to, for instance pay off borrowings, it can be taken and used to augment income over a period. Being capital rather than income, it is not taxed, so every pound taken is a pound in one's hand."

If it is saved or invested, use an individual savings account, so the income and gains are free from tax.

• The income you earn past the state pension age is boosted by age-related benefits, Lothian noted. "Firstly, there are no employee national insurance contributions beyond the state pension age, saving 12 per cent on employed income above 5,304 a year.

"Secondly, there is the age allowance of 9,940, which provides an additional 2,465 of tax-free income (compared to the personal allowance of 7,475]. The tax saving is therefore 493."

• Working past the pension age may allow you to delay taking an annuity, or mean you can use some of your pot to buy an annuity now, before rates fall further, and buy another later on. Either way, shop around for the best deal rather than immediately accepting the offer from your pension provider. This move could add up to 20 per cent to the income you get from it. If you smoke or suffer from ill-health, apply for an enhanced annuity, which can deliver a significant boost to your pension income.