How to best prepare to work beyond retirement age

Government figures show that there were 1.4 million people aged 65-plus in the workforce in 2011 - twice the number working at that age in 1993.

This growth is down to several factors. As well as improvements in health and a shift in the state pension age, the default retirement age was scrapped in 2011, allowing people to stay in work as long as they like.

"Whether out of choice or necessity, almost a quarter of employees now expect to work to age 70 and beyond," says Will Aitken, senior consultant at Towers Watson. "For those happy to stay in work, it's a very positive trend."

Flexible working

There's also plenty of evidence that employers are supporting the older workforce. While some companies - for example, B&Q and BT - have been trailblazers with policies such as flexible working, age-neutral recruitment and non-age specific benefits packages, more employers are creating greater flexibility to accommodate older workers.

"We're seeing supermarkets recruiting a lot of older people as they can be more dependable. But there's also huge demand from some of the more technical industries such as engineering, technology and aerospace where they need to retain the knowledge," adds Aitken.

As the transition between working and retirement gets increasingly blurred, there are a number of financial planning issues you'll need to consider.

New income streams such as your private and state pensions will open up, but you may also have more flexibility around the income you receive from your employer.

For example, part-time working is something that is welcomed among older employees, according to research by Prudential. It found that 32% of those considering working past the state pension age would ideally like to remain in their current role, but on fewer hours.

Craig Palfrey, managing director of, suggests older employees create a cash-flow analysis to work out what income they will need, and when.

"It's likely your requirements will change as you move from work through the early years of possibly part-time retirement, into the longer years of permanent retirement," he says.

Such an analysis makes it easier to know when you can consider switching on or off various income streams, ensuring you match expenditure and helping to minimise the amount of tax you'll pay.

Tax and national insurance

Although the government is phasing out age-related income tax allowances, if you were born before 6 April 1948, you will get a higher personal allowance.

This tax year that equates to an extra £500 if you were born between 5 April 1938 and 6 April 1948, or £660 if you were born before then.

But this extra starts to be reduced at the rate of £1 for every £2 of income above £27,000, disappearing altogether if you earn income of £28,000 (or £28,320 if you are older and qualify for the extra £660).

You will, however, see a reduction in the amount of national insurance you pay once you hit state pension age, as you'll stop paying class 1 contributions (class 2 if you're self-employed).

On an annual salary of £15,000 this will boost your income by £845 a year (2014/15); on a £40,000 salary it would add £3,845 a year.

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Size up your state pension

Another new source of income will be your state pension, but if you don't need the extra income immediately, it can be worth delaying it.

Barry O'Sullivan, pensions manager at Lowes Financial Management, explains: "For every five weeks you defer, the amount you'll receive increases by 1%, equivalent to an uplift of 10.4% if you put it on hold for a year.

"In addition, if you defer for at least a year you could take it as a lump sum, in which case you'll get interest on it at 2% above the Bank of England base rate."

Unfortunately, as with many good deals, it won't be around forever. If you're not due to reach state pension age before 6 April 2016, you'll see the lump sum option disappear and the 'deferral rate' reduced to 5.8% a year.

Tom McPhail, head of pensions research at Hargreaves Lansdown, says this means people will have to live around 19 years after deferral to recoup the income lost over that deferred year, compared with only around 10 years under the current rate.

Perfect your pension

Greater flexibility around how you take your private pension also means you will be able to match it to your income requirements.

Under the current rules, most pensions will allow you to take a full pension; use drawdown to take a smaller income and leave your fund invested; take the tax-free cash only; or even delay taking an income altogether until you're 75.

Vince Smith-Hughes, head of business development at the Prudential, says your decisions around how - and whether - you tap into your pension can make a significant difference.

"It's worth assessing your other income sources before tapping into your pension. If you take an income from your pension through an annuity or drawdown, you may be liable to income tax on it," he explains.

"In addition, the death benefits also change significantly once you vest it and take your 25% tax-free cash."

Death benefits

It can certainly pay to consider these death benefits. Currently, if you vest your pension the remaining fund can go to a dependant as an income.

If it's paid as a lump sum, there will be a 55% tax charge but it can go to anyone. Conversely, if your pension's left untouched and you die before age 75, you can leave it tax free to anyone you like.

O'Sullivan says this can be a real incentive to leave a pension untouched. "If you can afford to leave it and take income from other sources then this will often be your best option. As an example you could take an income from your Isas. These are in your estate for inheritance tax purposes, whereas an untouched pension fund wouldn't be," he explains.

Delay taking your pension until next April and you'll be able to take advantage of even greater flexibility around how you take an income in retirement. The new options, which include taking your whole pension as a lump sum, should make it even easier to use your fund to support you beyond state pension age.

Smith-Hughes adds: "The new pension rules have introduced more flexibility but they may also mean greater complexity. It will make it even more important to take bespoke financial advice around your options."

This article was written for our sister website Money Observer