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Question: I am aged 73. I became eligible for state pension when I was 65 but chose not to take it at that point because I was in full-time employment and already paying the higher rate of income tax. I retired completely from employment when I was 68 and then chose to take my state pension, which —with my work pension — meant that I was on the lower rate of income tax. However, when I was 70 I started working part-time. This now means that I am in the bizarre situation of effectively paying the higher rate of income tax on a minimum wage. Can I defer my state pension again temporarily.
Answer: For most people their state pension forms a valuable foundation for their income in retirement. Those who claim the new state pension could be receiving over £12,540 a year.
But the state pension is now hovering just slightly under the frozen personal allowance – the salary level over which people pay income tax – of £12,570.
If the state pension rises by 2.5 per cent next year – the minimum increase possible under the triple lock guarantee – it will exceed the personal allowance for the first time, meaning someone receiving the full amount should, in theory, have to pay basic rate tax on part of it.
Once you add in a workplace pension and, in your case, part-time earnings, it becomes clear how some pensioners are being pushed over the frozen higher-rate income tax threshold of £50,270, as fiscal drag pulls more people into higher tax bands.
We tend to think about the state pension as an immovable feast. You start claiming it when you reach state pension age and that’s it. However, as you point out pensioners have some flexibility over the timing and payment of their state pension.
“Deferring” a state pension can be split into two different actions: people can delay taking their state pension for the first time; and once they are claiming it, they can pause taking it.
They can do both actions only once. So, as in your case, they could delay taking it initially and then, when in payment, pause it once. But they could not pause it, start it again, and then pause it a second time.
There is no time limit for how long people can delay or pause the state pension for. But there are financial consequences behind both actions so it’s worth thinking through and whether it’s worthwhile given the individual’s personal circumstances.
The financial position is the same if they delay claiming it or pause taking it. Individuals must defer their state pension for at least nine weeks before they can claim increased regular payments. For every nine weeks they defer, they’ll get 1 per cent added to their regular weekly pension payment for life, working out as just under 5.8 per cent for every 52 weeks they delay or pause.
For some people, instead of delaying or pausing their state pension they may want to take it as normal and if they don’t need the income invest it, especially if they think they can get a return higher than 5.8 per cent.
But if they are delaying or pausing it because of tax reasons, then they will need to figure out how much tax they are saving themselves today. But they also need to factor how much money they are “losing” by not taking the state pension monthly payment. If they pause it for a year, then it would take around 17 years to get back the missed gross payments. So, if they paused at age 70, then they’d usually break even around 87, but that could depend on tax rates and bands over the 17 years.
This is a personal decision weighing up whether it’s best to pay a bit more tax today, but with the reassurance that you are receiving the payments due to you (possibly investing them). Or whether by pausing the state pension you can save yourself additional tax today and live long enough to claim back the full amount you missed.
However, this is a tricky decision as you are basing it not only on tax rates and thresholds today but also on what they may be in future, and you may find the act of increasing your state pension may mean you end up paying higher rates in either case.
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