Pensioner tax bills are rising with the personal allowance frozen at £12,570 for six years, while the triple lock drives up the state pension. They will continue to rise until the freeze is finally lifted in the 2027/28 tax year.
At the same time, more pensioners are earning income as they work past retirement age, start side hustles or take in lodgers to make ends meet.
The result? An even bigger income tax bill.
Many will be scraping around for ways to beat the freeze, such as making smaller pension withdrawals and using their Isa allowances, but there is one option that may suit those nearing retirement.
One in four Britons don’t realise they are not obliged to draw their state pension when they turn 66, research from retirement specialist Just Group shows.
Instead, they can defer drawing their pension and in return get more money when they do finally take it.
State pension deferral won’t work for everyone. The vast majority need every penny they can get in retirement and will claim their pension as soon as they can.
Yet for those with other sources of income, it can bring huge tax benefits as HMRC bills rise. Especially for those who are lucky enough to earn a decent income in their late 60s.
Every year, HMRC tots up all your earnings from a job, pension, investments, rental income or any other source, and adds them to your state pension before working out your income tax bill.
Thanks to the freeze, more pensioners are paying more tax, and can be driven into a higher tax bracket, too.
By taking your state pension out of the mix by deferring it, you can potentially reverse this.
Someone getting the full new state pension of £11,502 only needs to earn £1,068 from other sources to exceeded the personal allowance and pay tax on the money.
If they defer their state pension, they suddenly have the full £12,570 personal allowance at their disposal.
While deferral involves sacrificing state pension income at first, there are rewards for doing so.
Pensioners who retire from April 6, 2016 on the new state pension can get one percent extra pension for every nine weeks they defer.
That’s equivalent to nearly 5.8 percent extra for a full year of deferral.
With the full new state pension now worth £11,502 a year, deferring for just one year will give you almost £665 extra.
Better still, that will rise every year in line with the triple lock, along with the rest of the state pension.
However, there is a downside warns Just Group’s communications director Stephen Lowe. “It takes at least 15 years to recoup the pension you originally sacrifice. After that, though, you’re in profit.”
The longer you live, the more sense it makes. “Deferral therefore suits those who are in better health with higher life expectancy,” Lowe said.
Deferring is actually simpler than drawing your state pension. Roughly two months before your 66th birthday you will receive a letter from the DWP asking if you want to claim your state pension.
If you don’t reply it will be automatically deferred until you do claim it.
Sadly, state pension deferral is less attractive than it used to be.
Those who retired before April 6, 2016, on the old basic state pension got an extra one percent for every five weeks they defer.
That gave them an annual rise of 10.4 percent which works out at around £917 extra a year, which could be taken either as extra income or a lump sum.
If you have already started claiming your state pension, you can choose to stop claiming it for a while to build up more money for the future.
However, you can only do this once.
Deferring is a complex decision with both pros and cons. In practice, nine out of 10 start drawing the state pension the moment they turn 66.
Many wish they could take their state pension early instead, especially those who cannot work due to poor health or caring duties, but that isn’t an option today.
