Image: © Cristina Gottardi via Wikimedia Commons

Working pensioners are being stuck with a big tax bill

Withdrawing your state pension while still employed often means getting taxed as though you’re a high earner.

Half a million British OAPs may be unnecessarily paying £3,000-£4,000 of their state pension to the tax office. The reason? They’ve continued working after hitting 65 - the age at which the UK government (currently) starts paying out a pension. When you're not officially retired, the government treats your pension income as though it were just an increase in your salary. Higher salaries are taxed at a higher rate.

Working over-65s can (and should) defer their pension start date to avoid this, but according to a former pensions minister the government has done a crummy job of telling people that. There's already a lot of worry that most people's pension pots aren't big enough to support them all the way through their retirement. Taking more money out of them seems likely to compound the problem.

The UK's state pension system was put in place at a time when most people didn't live many years past retirement age. Now, British life expectancy is 81 years old, which means the average person’s pension needs to support them for sixteen years if they stop working at 65.

That limits how generous pensions can be. The latest state pension (for men born after 1951 and women born after 1953) works out as £168.60 a week. That's under a third of the average weekly wage of £569. Working past 65 may therefore make financial sense for many Brits. And delaying taking their pension means they'll collect more money when they do retire: the government ups it by 6 percent for every year you defer.

Read our explainer on: tax 

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