DWP Extra £694.43 for State Pensioners: Millions of state pensioners are being advised to consider deferring their state pension payments in order to potentially secure an extra £694.43. This advice comes as analysts warn about an emerging “stealth tax” that could impact around 32 million people by 2027-28.
The issue arises from fiscal drag, which occurs when income thresholds remain frozen while wages rise, causing more people to enter higher tax brackets.
What is Fiscal Drag and How Will It Affect You?
Fiscal drag is a situation where tax thresholds are not adjusted in line with inflation or income increases. This leads to individuals being pushed into higher tax brackets without their income actually increasing in real terms. It’s predicted that by 2027-28, 18 million Brits will be taxed for the first time, while 12 million will face a higher 40% tax rate. Additionally, individuals earning over £125,140 will find themselves in the 45% tax bracket.
While the government avoids the controversy of raising tax rates, freezing the thresholds has proven financially beneficial for the Treasury. According to the Office for Budget Responsibility (OBR), fiscal drag is expected to generate £42.9 billion by 2027-28.
How Deferring Your State Pension Could Help
In light of this looming tax increase, wealth management experts, including Quilter, are advising people to consider deferring their state pension payments. By doing so, individuals could see an increase in their pension amount.
Financial experts like Craig Rickman, personal finance editor at Interactive Investor, explain that deferring your state pension could bring financial benefits. Specifically, for every nine weeks you defer, your pension amount increases by 1%. Over the course of a year, this could amount to an additional £694.43 in state pension payments.
This strategy might be particularly beneficial for those who are still working and are concerned that a significant portion of their state pension will be taxed at higher rates. If you defer your pension, you could avoid having part of it swallowed up by taxes in the short term.
The Trade-Off: Deferring vs. Claiming Immediately
However, deferring your state pension is not without its trade-offs. If you choose to delay claiming your state pension, you would be forgoing a year’s worth of payments. For some individuals, this might not make sense unless they are certain they will live long enough to benefit from the additional payments. As Rickman notes, “unless you live for around a couple of decades,” deferring might not be the most financially beneficial option.
State pensioners facing the rising impact of fiscal drag and potential tax increases might want to consider deferring their state pension to avoid higher tax brackets. While the potential for an extra £694.43 per year is appealing, it’s important to weigh the trade-off of forgoing pension payments for the short term.
Everyone’s situation is different, so it’s essential to carefully assess whether deferring or claiming your pension immediately is the best choice for your financial future.
Source
FAQ
What is fiscal drag and how does it affect my state pension?
Fiscal drag occurs when tax thresholds are frozen while incomes rise, pushing more people into higher tax brackets. This means that as your income rises, including state pension payments, you may pay more tax. Deferring your state pension can help avoid this tax increase.
How can deferring my state pension help me avoid higher taxes?
Deferring your state pension can increase the amount you receive by 1% for every 9 weeks you delay. This may help you stay in a lower tax bracket by reducing the amount of income taxed in the short term, especially if you’re still working.
How much extra can I receive by deferring my state pension?
For every 9 weeks you defer your state pension, it increases by 1%. Over 12 months, this could amount to an additional £694.43, making deferral a potentially useful strategy for avoiding higher taxes in the future.
What are the downsides of deferring my state pension?
The primary downside is that by deferring your state pension, you forgo receiving it for the duration of the deferral period. If you don’t live long enough to enjoy the additional payments, you may not get the financial benefit you hoped for.
Who should consider deferring their state pension?
Deferring might be a good option for people who are still working and earning income, as it can help avoid high taxes on your pension payments. It also benefits those who expect to live long enough to gain from the increased payments over time.