State Pensioners Face HMRC Tax Notices as Pension Age Rises
State pensioners across the UK are being sent letters from HMRC after failing to realise their pension income is taxable, coinciding with significant changes to the state pension age. The state pension age is set to gradually increase from 66 to 67, affecting those born between March 6, 1961, and April 5, 1977, who will only become eligible upon reaching their 67th birthday.
Tax Awareness Gap Among Retirees
Sarah Pennells, consumer finance specialist at Royal London, highlighted that approximately four in 10 adults are unaware the state pension is taxable, as it is paid without tax deductions. "The fact that approximately four in 10 adults do not know the state pension is taxable is not surprising as it's paid without tax being taken off," she said.
From April, the full new state pension will be less than £30 below the personal allowance, making it crucial for individuals to understand potential tax obligations. Royal London's research indicates that nearly 68 per cent of retired individuals not in employment paid tax on their pension income, with the average bill exceeding £4,500.
Impact of Pension Age Increase
The transition to a higher state pension age is expected to be fully implemented by 2028. Pennells noted that with the state pension age now at 66 and rising to 67 from April, many are eager to claim their pension. However, deferral rates have fallen dramatically, possibly because fewer pensioners can manage without the state pension.
"Our figures show that some people, for whatever reason, are delaying getting their State Pension payments. The numbers deferring in 2023/24 have fallen quite dramatically from the previous year, which could be because fewer pensioners are able to manage without the State Pension," Pennells explained.
Considerations for Deferring Pension Claims
With the new state pension rising close to the personal allowance, there may be an increase in deferrals among those with other income sources to reduce tax. Pennells advised careful assessment before delaying claims. "If you’re thinking of delaying claiming your State Pension, then it’s a good idea to assess whether it is right for you. Getting the extra money may look attractive, but you are giving up the right to receive any State Pension payments until you stop deferring, and it could take years to see the benefit," she said.
She also warned that if someone defers their pension and dies, their surviving spouse or civil partner will only receive extra pension if the deferrer reached state pension age before April 6, 2016. These factors underscore the importance of informed decision-making regarding pension claims and tax implications.
