HMRC confirms £727.48 state pension handout with 1-year rule | Personal Finance | Finance

State pensioners can legally avoid tax on their state pension and gain £727.48 a year extra in their pension pot, HMRC has confirmed.

The little-known loophole is all about deferring your state pension to get more money in your pension pot which, if you live an average lifespan, could actually see you collect more state pension money than if you collect your DWP payments as soon as you’re eligible.

And if you’re still earning money when you become eligible for the state pension – at age 66, or 67 from now – you could even save yourself from being taxed on your pension by deferring.

Currently, you won’t be taxed on your state pension if it’s your only income, although in 2027, the Triple Lock boosts will catch up with frozen Personal Allowance thresholds, and that could change.

But if you’re still working, you would pay tax on your state pension at your normal tax rate. If, for example, you’re earning over £51,270, you’d lose 40% of your state pension payments income to tax.

If you defer your state pension – ie don’t claim it for a year or more – you’ll add 5.8% to your state pension pot for every year you don’t claim it, which on the full new state pension works out at £727.48 a year.

The government explains: “You can get your deferred pension as an extra payment on top of your regular payment.

“You must defer claiming your State Pension for at least 9 weeks before you can claim increased regular payments.

“For every 9 weeks you defer, you’ll get 1% added to your regular weekly pension payment for life.

“This works out as just under 5.8% for every 52 weeks (12 months) you defer.

“Example: You get £241.30 a week (the full new State Pension). If you defer for 52 weeks, you’ll get an extra £13.99 a week (5.8% of £241.30).”

For 52 weekly payments, this makes £727.48 extra.

Deferring also means you don’t lose any of the state pension income to tax if you’re still working, so it could be a double win – less tax now, more money later.

Of course, you’d lose your pension income in the year you deferred it, but that extra £727 is paid every year until you die.

So eventually, what you lost in the first year of deferral could be overtaken by what you gain long term – and this would come around much quicker if you already lost some state pension to tax, effectively avoiding that tax entirely and boosting future pension years instead.

The £727 amount is based on someone having the full new state pension amount, which requires a full National Insurance record of about 35 years. If you had an incomplete record, your total gain from deferral may be lower in cash terms, but it would still represent 5.8% of your total pension allowance.

Financial Advisers Red Dot Group explain: “To make the most of your retirement, consider reviewing your overall financial plan.

“One of the first steps could be obtaining a State Pension forecast. This free service from the government lets you check how much you’re likely to receive and identify any gaps in your NI record.

“Additionally, explore options like deferring your State Pension. For each year you delay claiming it, your payment increases by around 5.8%, which may be valuable for those who can afford to wait.”

Previously, money expert Martin Lewis spoke about this method. He said: “Defer your state pension, and the maths works out that if you live longer than typical life expectancy, you’ll gain; if you live less, you’ll lose. Live a typical lifespan and it’ll be pretty neutral.

“So if you’re in poor health, it’s not really worth considering. If you’re in great health with a history of family longevity, deferring could be a winner.

“Otherwise the real issue is tax – if you’re earning or have a decent income now, but’ll pay tax at a lower rate later on, then deferring can be very worthwhile.”