Brits who defer drawing their state pension could lose hundreds of pounds over the coming years, according to a pensions expert. Reports suggest that those who delay claiming the state pension to earn more will have it taxed under new rules.
The state pension is set to rise above the personal tax allowance from next year, meaning a portion of it will be liable for income tax. The Government has said people who rely on the state pension as their only source of income will be exempt, but reports indicate the exemption will not include those who deferred taking it when they reached state pension age, which is 67 for people born after April 5, 1960.
Deferral penalty warning
Deferring can mean you receive extra state pension when you eventually start claiming it. The state pension increases by 1% for every nine weeks you put off claiming, working out at just under 5.8% for every full year you don't claim.
Former pensions minister Steve Webb, now a partner at pension consultants LCP, said those who defer could be penalised. He said: "Those with 'increments' on top of their state pension are likely to miss out on the Government's new tax waiver for those wholly dependent on the state pension. This could cost them hundreds of pounds in the coming years."
Tax allowance and state pension rise
The personal tax allowance is frozen at £12,570. Income tax is not paid below this figure, but anything above would be liable. It has yet to be confirmed what the state pension will be next year.
Under the triple lock, the state pension rises by the highest of three measures: CPI inflation, average wage growth or 2.5%. With wage growth currently the highest at 4.1%, it appears this will likely set the rate the state pension rises by. A 4.1% increase would raise the state pension to £13,062 next year, meaning £492 could be subject to income tax. But people who deferred their state pension would incur a higher tax bill.
Fairness concerns raised
Lily Megson-Harvey, policy director at My Pension Expert, said the suggestion that people who defer their state pension could miss out on the planned tax exemption raises a serious fairness concern. She said: "Deferral has long been presented as a legitimate way to boost state pension income later in life. If that decision now leaves someone facing tax even where the state pension is their only income, it risks penalising people for planning effectively."
Ms Megson-Harvey urged the Government to provide urgent clarity on who qualifies and whether the current approach creates unintended cliff edges for those who deferred.
A Treasury spokesperson said: "Pensioners whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this Parliament. By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from one of the most generous personal allowances in the G7."
