Martin Lewis urges state pensioners ‘avoid tax on pension legally’ and get £667 | Personal Finance | Finance
Martin Lewis has shared a little known tip which can help you avoid tax on your state pension.
The Money Saving Expert founder says that everyone on the state pension, whether the New State Pension or the Basic State Pension, can get more money in their pension pot if they live long enough – by deferring their pension until later.
And if you’re still earning money when you become eligible for the state pension – at age 66, or 67 from 2028 – you could even save yourself from being taxed on your pension by deferring and sometimes this can work out better in the long run.
Currently, you won’t be taxed on your state pension if it’s your only income, although in a couple more years, the Triple Lock boosts will catch up with frozen Personal Allowance thresholds and that could change.
But if you’re still working, you would pay tax on your state pension at your normal tax rate. If, for example, you’re earning over £51,270, you’d lose 40 percent of your state pension income to tax.
If you defer your state pension – ie don’t claim it for a year or more – you’ll add 5.8 percent to your state pension pot for every year you don’t claim it, which works out at £667 a year.
Of course, you’d lose your pension income in the year you deferred it, but that extra £667 is paid every year until you die.
So eventually, what you lost in the first year of deferral could be overtaken by what you gain long term – and this would come around much quicker if you already lost some state pension to tax, effectively avoiding that tax entirely and boosting future pension years instead.
Martin Lewis said: “Defer your state pension, and the maths works out that if you live longer than typical life expectancy, you’ll gain; if you live less, you’ll lose. Live a typical lifespan and it’ll be pretty neutral.”
“So if you’re in poor health, it’s not really worth considering. If you’re in great health with a history of family longevity, deferring could be a winner.”
“Otherwise the real issue is tax if you’re earning or have a decent income now, but’ll pay tax at a lower rate later on, then deferring can be very worthwhile.”
Martin Lewis’ MSE added: “In general, if you defer for any amount of time, you’d need to live for around 20 years after taking your state pension to even out the amounts… which is around the time an average 66 year old is expected to live.”
“This is very relevant to the choice of whether to defer.”
“If you’re in poor health and worried about life expectancy, then deferring isn’t likely to help as you’re less likely to hit the 20-year break even point.”
“Yet if you’re in good health and feel reasonably confident about your life expectancy, then you might beat the odds and profit.”