State Pension – to claim or not to claim?

The average age of a UK farmer is now 59 and with changes to the State Pension regime, it may be time to consider how these may affect you.

The full basic state pension is currently worth £8,767.20 a year and you can check when you are entitled to claim using the H M Revenue & Customs State Pension calculator. The pension age is rising and it will reach 66 in October 2020 and 67 between 2026 and 2028. The pension is paid gross with no income tax deducted at source and therefore individuals will pay tax on it at their marginal rate of tax in the year of receipt.

With many farmers working beyond their State Pension retirement age and receiving remuneration for their work, either as an employee, partner or director, the addition of the state pension may create an income tax issue. In Scotland if you earn above £43,430 in the tax year (2019/20) then you are liable to pay tax at 41%, so if the State Pension income falls into this tax bracket then 41% is lost, which may not have been anticipated. If you do not require the cash immediately other options can be considered.

To receive the pension, you need to claim it as it is not paid out automatically when you reach retirement age. There are then choices to be made.

One option may be to delay (defer) claiming it until a time of your choosing, which may allow for some tax planning opportunities. By deferring the state pension, you can get an increased weekly amount once you start to claim it, as long as you have deferred it for at least 9 weeks. The state pension will increase by the equivalent of 1% for every 9 weeks you defer. Deferral will enhance future pension income by 5.8% for every year deferred, although you would need to live at least a further 17 years to recoup the income lost by deferring from just one year. Prior to the change of rules in April 2016 the enhancement due to deferral amounted to 10.4% per year, which was a lot more attractive.

It may also be possible to claim the State Pension and use the money to fund a personal pension contribution and obtain tax relief to the same value as that suffered on the income, to make it in effect tax neutral. This will depend on your own personal circumstances and the level of earned income so advice should always be taken from a registered pensions advisor.

There are various options open to individuals approaching State Pension age and these should all be explored and professional advice taken before a decision is made to avoid any unforeseen tax consequences.

For more information or advice regarding your pension options, please contact a member of our EQ Agriculture team via agriculture@eqaccountants.co.uk or call 01307 474274 / 01334 654044.