There has been a lot of noise in the media about older workers falling in a pension tax trap. An analysis by a mutual insurer revealed this impacts approximately half a million workers. The workers could be paying unnecessary tax on a state pension because they have not deferred it until they stop work.
Royal London say that this impacted those choosing to work beyond the pension age. If this worker is earning more than the taxable allowance, then the state pension could be deducted tax too. Pension schemes are full of intricacies that can impact the value of your fund. This need to defer your state pension to prevent tax liability is one such intricacy.
How much could it cost you?
Over the course of your retirement, men could be better off by approximately £3000 if they defer the state pension. As women tend to live longer beyond retirement, this deferment could hold a saving of about £4000. (The Independent, April 2nd 2019)
Many people choose not to take the state pension at the Normal Pension Age. Instead, they decide to keep working. If you choose to defer the state pension, then you can receive an enhanced pay-out when you do start to claim your rightful monies.
This means a failure to defer could cost you in two ways. First, you could be asked to pay tax on the pension. Second, the opportunity for an enhanced higher pension is lost, which may not be taxed under the personal allowance set for those over 65, depending on the combined total of all your pensions.
How big a problem is this?
The reporting of a tax-trap in the newspapers may feel deliberately emotive. However, there are 1.1 million workers over the age of 65 in the workforce. So, although the impact may not be high, the potential money gained could make life easier when you do retire.
You should receive a letter from the Government asking if you want to receive your state pension. By selecting not to reply, you automatically defer receipt of your pension. Alternatively, if you have already said you would like to receive your pension and realise now you do not, you can refuse to claim the pension five times in a row, and this will mean you have deferred. The government has clearly laid out the policy surrounding deferment on their website.
For every five weeks you defer your state pension you will boost your pension by 1%; over the course of a year, you could increase your pension by 10.4%, depending on whether the pension is taken before or after April, 2016.
Your teachers’ pension could help
Your teachers’ pension scheme also comes into effect at your normal pension age, or when you apply for retirement. You will receive a lump sum and annual income, depending on your choices. It may be possible to use your teachers’ pension to cover your living costs and so storing the value in your state pension for a future time in your life; for instance, when you may need more care. It is a good idea to plan your retirement by speaking to a financial advisor.
The content in this article was correct on 22nd April 2019. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on your teachers’ pension scheme, as well as financial matters in general. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.