If you decide to continue working past the State Pension age, you could be paying unnecessary tax.
You may have failed to take up the option of deferring your State Pension until you stopped work and as a result, your entire State Pension will be taxed, in some cases at 40%.
If you defer taking your State Pension, you would also receive a higher pension when you do eventually retire, and your Personal Tax Allowance would then cover all or most of your State Pension, dramatically reducing the amount of tax they have to pay on their pension.
Those who defer their State Pension can receive 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 while 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 of 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 of 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
If you have already started to draw your State Pension, you do have the option of ‘un-retiring’. All you need to do is tell the Department for Work and Pensions (DWP) to stop paying your State Pension and then resume receiving it at a higher rate once you stop working.
There has been a significant increase in the number of people working past the age of 65, and most of these people are claiming their State Pension as soon as it is available. This means every penny of their State Pension is being taxed, in some cases at the higher rate. If an individual’s earnings are enough to support them, it could make sense to consider deferring taking a State Pension so that less of their pension disappears in tax.
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Traditional retirements are a thing of the past. We’re living longer and have more flexible income options to make our money work harder at retirement. If you would like to discuss any elements of your future retirement plans, please contact our Wealth Planning team on firstname.lastname@example.org or 01295 250401 or contact us here.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.