Workers paying ‘unnecessary’ tax on state pension - Royal London

More than half a million (520,000) workers aged over 65 faced tax bills of up to 40 per cent after failing to defer their state pension, Royal London has found.

Employees past state pension age who did not defer their state pension saw their total earnings rise over the tax threshold and their entire state pension was taxed, in some cases at 40 per cent.

If an employee over the age of 65 opts to defer taking their state pension, they will receive a higher state pension upon retirement, and their personal tax allowance will then cover all or most of their state pension, which, in turn, dramatically reduces the amount of tax they have to pay on their pensions.

Royal London revealed that, in 2017, there were approximately 1.1 million people in the workforce aged 65 or over, with around 950,000 of those combining paid work with drawing a state pension.

Those who defer their state pension can receive an additional 5.8 per cent per year on their pension for the rest of their life for each year after they defer.

Royal London has calculated that a man who defers for a year and has a life expectancy at 65 of 86 will be around £3,000 better off during retirement, compared with someone who takes his state pension immediately and pays more tax.

The benefits are even greater for women still working at 65 with a life expectancy of 88, as they can expect to be £4,000 better off, while also receiving a tax advantage and enjoying two additional years of pension at the higher rate.

For those that have started drawing their state pension but are still in work, Royal London has claimed that “all is not lost”, as they are able to “un-retire”.

If they notify the Department for Work and Pensions (DWP) and inform them that they are still working, the department can stop paying their state pension and they can resume receiving it at a higher rate when they enter retirement.

Commenting, Royal London director of policy Steve Webb 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.

“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.”

Royal London has urged the government to make people more aware of the option of deferring their state pension, particularly those that are working part state pension age.

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