State pensioners who choose to defer their Department for Work and Pensions (DWP) payments will be excluded from Labour's proposed tax waiver, a move that could cost them hundreds of pounds a year, according to pensions consultancy Lane Clark and Peacock (LCP).
Andy Burnham has confirmed that he and Labour Party Chancellor will uphold Rachel Reeves' promise to shield retirees from tax bills. They have stated that state pensioners whose sole income comes from the state pension will not be required to pay tax on it. However, the exemption will only benefit 700,000 people, while as many as 12.5 million will miss out, LCP warns.
Deferral Increments Excluded from Waiver
Former pensions minister Sir Steve Webb, now a partner at LCP, told This is Money: "As far as we can tell, anyone with increments on their state pension, including those for deferral, will miss out on the proposed tax waiver."
He added: "This could result in a loss of hundreds of pounds annually by the third year of the policy and makes deferring taking your state pension less attractive financially."
How Deferral Works and Its Financial Impact
Individuals are not required to take their state pension as soon as they become entitled to it. If they do not actively claim it, the pension is automatically deferred. Entitlement begins at state pension age, which is currently being gradually increased from 66 to 67 between April 2026 and April 2028.
Discussing the benefits of deferring previously, Martin Lewis, the BBC and ITV star, 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."
He continued: "Live a typical lifespan and it'll be pretty neutral." The 54-year-old went on: "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."
Tax Considerations for Deferring
Lewis added: "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."
The exclusion of deferral increments from the tax waiver could significantly alter the financial calculus for those considering delaying their pension, potentially reducing the attractiveness of a strategy that has historically offered a higher weekly payment in exchange for a later start.
