Jun 26 2019
Article by

Half a million workers past pension age could be paying unnecessary tax

A significant number of people working past the State Pension age could be paying unnecessary tax on their State Pension, according to new research[1]. This is because they failed to take up the option of deferring their State Pension until they stopped work. As a result, their entire State Pension is being taxed, in some cases at 40%.

If they deferred taking their State Pension, they would also receive a higher pension when they do eventually retire, and their personal tax allowance would then cover all or most of their 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 at 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 at 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

All is not lost for those who have started to draw their State Pension, as they have the option of ‘un-retiring’ – they can tell the Department for Work and Pensions (DWP) to stop paying their State Pension and then resume receiving it at a higher rate when they stop work.

There has been a significant increase in the number of people working past the age of 65, and the research identified 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 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. A typical woman could be around £4,000 better off over the course of her retirement by deferring for a year until she has stopped work, and a typical man could be £3,000 better off.

Want to discuss your future retirement plans?

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 Fairstone on 0845 605 0689 or email info@fairstone.co.uk.

Source data:

[1] Royal London Policy Paper 33 – ‘Are half a million people paying unnecessary tax on their state pension?’ is available from www.royallondon. com/policy-papers. The analysis is based on the Family Resources Survey for 2016/17, which is a representative sample of nearly 20,000  households from across the United Kingdom.

Share this article


For further information, please contact:

Andrea Barker andrea.barker@fairstone.co.uk / Tel. +44 (0) 191 519 6243

Financial Insights

Oct 07 2019
Featured in North East Times Fairstone chief operating officer Adam Smith takes a look at the ethical investing space. Over the last few years, investors have been increasingly looking at investing...
May 08 2018
With auto-enrolment contributions set to rise again, South Tyneside-based Fairstone, one of the UK’s largest Chartered financial planning firms, reflects on the need for everyone to have a practical...
Nov 14 2017
Steve Easter, sales director at South Tyneside-based chartered financial planning firm Fairstone Group, looks at the current challenges and opportunities for buy-to-let investors British landlords...
Aug 21 2017
Published in the Telegraph on Friday 19th August 2017 Getting on the housing ladder is many young people's dream. How long will it take this couple to save, asks Sam Meadows Despite house...

Other articles from this publisher

Aug 30 2019
Those dearest to us, and those financially dependent upon us If something should happen to you, the last thing you want is for you or your family to be worrying about money. One of the most...
Aug 29 2019
‘Top 5’ list of planning areas Making sure you use up any allowances you are entitled to is the first step to reducing the amount of tax you may be liable to pay. We’ve provided our top five list of...