State pensioners can keep down their tax bill with a simple switch to their payments but there is an important rule to note. Claire Exley, head of financial advice and guidance at Nutmeg, has shed light on a simple switch that can help state pensioners manage their tax bills.
She discussed the option to defer receiving the state pension. You can do this when you reach state pension age if you choose not to claim your payments, and this option is also available to those who have already started claiming their pension.
Ms Exley said: “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’s a crucial rule to bear in mind for those considering deferring their pension after starting their claim.
The expert 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 rise by one per cent for each nine weeks they are deferred, amounting to an annual increase of 5.8 per cent, or 52 weeks.
Ms Exley further explained the tax implications 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, of Path Financial, discussed which individuals might find it beneficial to defer their state pension.
She suggested: “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.”