Deferring your state pension until you stop work can save unnecessary tax as well as boosting the value of your pension.
Increasing numbers of people are working beyond the state pension age but receiving their state pension as well, which pushes them into a higher tax bracket as a consequence, according to new research from insurer Royal London.
Since the turn of the century, the number of workers aged 65 or older has risen dramatically from under 500,000 to around 1.1 million in 2017. Of those, around 950,000 – over 85% – were also drawing a pension.
More than half a million of that 950,000 were earning enough through work alone to take them over the income tax threshold – which in the 2016/17 tax year was £11,000. As a consequence they would pay tax on the whole of their state pension.
If they were in a financial position to be able to defer their state pension until they stopped work and no longer had earned income coming in, in many cases their personal tax allowance would cover most or all of their state pension so they would pay little or no tax when they started receiving it again. In addition, their state pension would be boosted by 5.8% for every year of deferral.
At current rates, the 2019/20 state pension is £8,767; by deferring for a year this would rise to £9,275 for the rest of your life. If you paid tax on the full state pension at 20% you would lose £1,753.
What would be the benefit of such a move over a retirement, on average? Based on the average life expectancy at age 65, men (with another 21 years ahead of them) would be around £3,000 better off in total by deferring state pension for one year to reduce tax and boost the state pension payments, while women (with another 23 years to live) would gain around £4,000 over their retirement.
“For around half a million workers, every penny of their state pension is being taxed, in some cases at the higher rate. If their earnings are enough to support them, it makes sense to consider deferring taking a state pension so that less of their pension disappears in tax,” comments Steve Webb, director of policy at Royal London.
The report found that around one in 10 of those working past pension age are higher-rate taxpayers, for whom the argument in favour of deferral is much stronger because the whole of their state pension will be taxed at 40%.
Is it worth deferring for longer than a year, assuming you don’t need the income? While every year of state pension deferral adds another 5.8%, it also means a year less in which to enjoy the additional benefits. If you are fit and healthy, however, this may work in your favour.
Webb adds: “Those who have worked hard to build up a state pension through their working life do not want to see a big chunk of it disappear in unnecessary taxation. The government should be doing more to alert this group to the option of deferring, as current publicity is clearly not working.”
To start receiving state pension you have to actively claim it. See https://www.gov.uk/new-state-pension/how-to-claim for the various ways to do this. To defer your state pension if you have not already started taking it, simply do nothing.
To halt payments if you have already started to receive state pension, contact the Department for Work & Pensions and ask for it to be suspended. You can resume payments again at any time.