State pensioners can keep down tax bill with this change – but there’s a catch | Personal Finance | Finance
State pensioners can help keep down their tax bills with a simple switch but there is an important limitation to note.
Claire Exley, head of financial advice and guidance at Nutmeg, spoke about the option to defer receiving the state pension and who this would benefit – an option that it is available to people who have started claiming their pension.
She explained: “As state pension deferral can occur once it is in payment, it can be useful for those who would like to manage their tax liability due to a known increase in income in the future.”
However, there is an important rule to note for those considering deferring their pension having started their claim.
She said: “It’s important to note that deferral can only happen once and deferral once in payment is only available to UK and EEA residents.”
A person’s state pension payments will increase one percent for each nine weeks they defer, going up by 5.8 percent each year, or 52 weeks.
Ms Exley detailed how the tax implications work when deferring the state pension. She said: “The state pension is treated as pension income which is taxed in the same way as earned income (i.e. will use the personal allowance and basic rate bands before savings income and dividends).
“As tax is not deducted directly from the state pension, it can lead to additional tax being deducted from other sources if total income leads to tax being owed on the state pension.
“For instance, if someone is employed or has pensions in payment, it will be collected by an adjustment to their tax code.”
“Therefore, those with existing income may benefit from deferring their state pension, and this may include those who wish to continue to work post state pension age.”
Rowan Harding, financial planner at financial advice group Path Financial, also spoke about who it may suit to defer their state pension.
She said: “For those who continue to work past that age and don’t wish to pay more in income tax by commencing their state pension income, deferring their state pension could be a good option.
“But for most people, commencing their state pension income is likely to work for them, even if they have additional income tax.
“Also, being in receipt of state pension might provide you with the opportunity to pay any surplus income you have into other retirement saving pots.”
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