When it comes to retiring, you might like the idea of stopping working at the earliest opportunity.
But, it may make a lot of sense financially to carry on working a little longer.
Do I have to retire at state pension entitlement age?
Many people wrongly believe they have to stop working once they reach the state pension age, but this is not the case.
If you want to keep working — or need to keep working — you are able to do so. A forced retirement no longer exists meaning you can usually work for as long as you want to.
At the same time, if you’re lucky enough to have enough pension, there’s nothing to stop you retiring sooner.
What is the state pension age?
The state pension age is the earliest age you can start receiving your state pension. It may differ from the age at which you can get a workplace or personal pension. The state pension age is gradually increasing for men and women, and will reach 67 by 2028.
Steven Cameron, pensions director at pension provider, Aegon, said: “The state pension is the bedrock of many people’s income in retirement. As the current debate around the state pension triple lock has shown, it’s also hugely expensive for the government to provide. This is why, with people generally living longer, the state pension age is gradually being increased to avoid further increases in the costs, which are met from the National Insurance contributions of those of working age.”
How much will I get at 67?
If you retire at 67 when you receive the state pension, you will get £179,217 ($247,155), according to analysis by pension platform Interactive Investor. This assumes a 25% lump sum is taken, and that you get an income of roughly £7,000 a year to age 85, via drawdown. Income drawdown is a way of getting pension income in retirement while allowing your pension fund to continue growing.
The average retirement pot used in this analysis is based on average earnings (according to the ONS), 8% contributions, 1% salary growth a year, investment growth of 2.5%, and an annual management charge (AMC) of 0.65%.
Watch: Is a UK state pension enough to survive on in retirement?
What happens if I work a year longer?
If you work for another year and retire at 68, you will get £185,755, and income of roughly £7,500 a year until age 85, via drawdown.
What if I retire even later?
Analysis by Interactive Investor, based on the same assumption as above.
Retire at 67 and you’ll get £179,217 — income of roughly £7,000 a year until age 85 via drawdown
Retire at 68, and you’ll get £185,755 — income of roughly £7,500 a year until age 85 via drawdown
Retire at 69, and you’ll get £192,412 — income of roughly £8,000 a year until age 85 via drawdown
Retire at 70, and you’ll get £199, 191 — income of roughly £9,000 a year until age 85 via drawdown
Retire at 71, and you’ll get £206,095 — income of roughly £10,000 a year until age 85 via drawdown
Becky O’Connor, head of pensions and savings at Interactive Investor, said: “If you continue to work until 71, you’ll get an extra £20,000 on your pension. This is if your salary continues to grow, and you continued to work the same hours.”
What if earnings decline?
In reality, earnings and hours worked tend to tail off in your sixties. So how would this play out in terms of working past retirement?
O’Connor said: “If we assume that from age 60, someone’s earnings drop from a peak of £36,000 back down to £25,000 — roughly in line with what they started on in their twenties — but continued to work, as above, past 67, the numbers would be £170,088 at 67, rising to £191,285 at 71.”
Here’s the breakdown:
Retire at 67 and get £170,088
Retire at 68 and get £175,244
Retire at 69 and get £180,494
Retire at 70 and get £185,840
Retire at 71 and get £191,285
Even if your earnings decline in your sixties, it’s still worth continuing to work and contributing to your pension — if you can.
O’Connor said: “Clearly, nor everyone will be able to go on working; ill health and other commitments often get in the way. But crucially, there’s nothing in the rules to say you can’t continue to work after your state pension entitlement age if you want to — significantly boosting your eventual pension pot in the process.”
What’s the point?
While the figures may look persuasive, you might well be thinking: "what’s the point in boosting my pension if I’m just going to work until I drop?"
Reasons to continue to build your pot include being able to leave an inheritance to loved ones, while many people of state pension age want to go on working because it gives them a sense of purpose, enabling them to enjoy their retirement more when it eventually comes.
Be aware of the MPAA
If you access your pension income through drawdown after taking a lump sum at age 55 (soon to rise to 57), then your contributions will be subject to the Money Purchase Annual Allowance (MPAA).
This means the maximum you can contribute to your pension in any year drops from the annual allowance — which is £40,000 or your maximum earnings — down to £4,000.
In the examples set out above, which are average earnings and contributions, this wouldn’t be an issue, as the individual is contributing less than £4,000 a year (at 8% of their salary).
However, if someone wanted to contribute more than £4,000 once they’ve started accessing their private pension, they could be caught out by this — particularly if they are already claiming the state pension and are able to save more.