Pensions - Articles - You may be paying unnecessary tax on your state pension


New research published by mutual insurer Royal London has found that large numbers of people working past state pension age could be paying unnecessary tax on their state pension.

 This is because they have failed to take up the option of deferring their state pension until they stop work. As a result, the whole of their state pension is being taxed, in some cases at 40%. If they defer taking their state pension they will get a higher pension when they do retire, and their personal tax allowance will then cover all or most of their state pension, dramatically reducing the amount of tax they have to pay on their pension.

 Key findings of the research are:

 In 2017 there were around 1.1 million people in the workforce aged 65 or over; of these, roughly 950,000 were combining paid work with drawing a state pension;

 Out of this 950,000, more than half (around 520,000) were earning enough to take them over the tax threshold; this meant that the whole of their state pension was taxed;

 Those who defer their state pension can get an extra 5.8% per year on their pension for the rest of their life for each year that they defer. Comparing someone who draws their state pension immediately whilst going on working , with someone who waits for a year until they have retired before drawing their state pension, the research finds:

 A man who defers for a year and has an average life expectancy at 65 of 86 will be around £3,000 better off over retirement than someone who takes his state pension immediately and pays more tax;

 A woman who defers for a year and has an average life expectancy at 65 of 88 will be around £4,000 better off; as well as the tax advantage, she also enjoys two extra years of pension at the higher rate;

 All is not lost for those who have started to draw their state pension as they have the option of ‘un-retiring’ – they can tell the DWP to stop paying their state pension and then resume receiving it at a higher rate when they stop work.

 Royal London is calling on the Government to make people more aware of the option of deferring their state pension, especially those who are working past state pension age.

 Steve Webb, Director of Policy at Royal London said: “There has been a huge increase in the number of people working past the age of 65, and this research finds that most of these people are claiming their state pension as soon as it is available. For around half a million workers, this means 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. A typical woman could be around £4,000 better off over the course of her retirement by deferring for a year until she has stopped work, and a typical man could be £3,000 better off. 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”.

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