“70 is the new 60” or so they say. More of us are choosing to continue working until after official state pension age and this gives rise to pension planning decisions.
Meet Bob. Bob is a higher rate taxpayer aged 65 who is in full time employment; he enjoys his work and wants to carry on for a few more years. He will be entitled to his state pension when he reaches the age of 66 later this year.
One option available to Bob would be to defer his state pension and receive a higher weekly amount when he starts to draw it. Under the current rules, each nine-week deferral adds 1% when the pension is taken. This represents a 5.8% annual return.
The issue with this is that it would take several years after drawing the deferred pension to break even so Bob (or more accurately his estate) could be worse off if he dies before this point.
The alternative is for Bob to start taking his pension at 66. He would pay higher rate tax on the pension whilst he continues to work full time. However, he could contribute the equivalent of the state pension he receives into a private pension (subject to the annual allowance and total pension fund limit).
Although he would pay higher rate tax on the pension, he would receive higher rate tax relief on the contributions to the private pension and so the two amounts would cancel each other out.
This strategy would also put the pension contributions into a potentially inheritance tax free environment because private pension funds do not suffer inheritance tax.
There is much to be said for taking the state pension now, claiming 40% tax relief on payments into a new pension of which 25% can be taken out tax free and the remaining 75% may only be subject to basic rate tax in the future when Bob stops working.
However, the decision will depend on Bob’s perception of his health and life expectancy as well as his view of the return he will receive from investing his state pension.
We can provide tax and numerical analysis to help guide you on similar “what if” pension conundrums.
Photo by Carter Yocham on Unsplash