How your pension income is taxed
In this section:
- Tax on your State Pension
- Tax if you take your State Pension later on
- Tax on company, personal or foreign pensions
- Tax on retirement annuities
- Tax on a pension you pass on or inherit
Tax if you take your State Pension later on
If you put off claiming your State Pension (called 'State Pension deferral') you can earn either extra State Pension or a one-off taxable lump sum payment. If you're already paying tax you'll pay tax on these extra payments at the same rate as you're paying on your other income, and they won't affect any higher age-related allowance you may be receiving.
How State Pension deferral works
State Pension deferral means you can put off claiming your State Pension when you reach State Pension age. You can also choose to stop claiming it after having claimed it for a period.
Your State Pension age is set by law and is 65 for men and 60 for women born on or before 5 April 1950. The State Pension age for women born after 5 April 1950 will increase from 60 to 65 between 2010 and 2020. You can delay drawing your State Pension as late as you wish - no matter what date you retire.
Follow the links below to learn more about State Pension deferral and changes to the State Pension age. These guides also cover changes which take place from 6 April 2010.
Read about changes to the State Pension age on the Directgov website
Choices and tax when deferring your State Pension
Since 6 April 2005, if you put off claiming your State Pension (whether you are working or not) you can choose one of the options below when you do claim. Either way.
Extra State Pension
If you put off claiming your State Pension for at least five weeks you can earn an increase to your State Pension of one per cent for every five weeks you put off claiming. This is equivalent to about 10.4 per cent extra for every year you put off claiming. The extra State Pension will be paid to you when you start to claim.
The extra State Pension counts as taxable income in the same way as the normal State Pension, but if your income is low no tax is due and you may be able to get other benefits. If you already pay tax, the extra income you receive won't affect your current tax rate or any age-related allowance to which you are already entitled.
A taxable lump sum payment
If you put off claiming your State Pension for at least 12 consecutive months, you can choose to receive a one-off lump sum payment and your State Pension paid at the normal rate. The lump sum payment, when you claim it, will be based on the amount of normal weekly State Pension you would have received, plus interest added each week.
Your lump sum will not affect the rate at which you are already paying Income Tax - it will be taxed at the same rate.
Similarly, if you are entitled to a higher age-related allowance (see guide below for information about age-related allowances), and a lump sum would otherwise take your income above the limit beyond which the age-related allowance starts to be reduced, you will keep the higher allowance.
Effect of deferred pension on 'taxable income' when claiming income-related benefits
To find out what effect a deferred State Pension (whether taken as income or a lump sum) has on other benefits you may be claiming - including Pension Credit, Housing Benefits, Council Tax Benefit or Tax Credits - follow the link below to The Pension Service website.
How State Pension deferral affects your benefits and tax credits – The Pension Service website
Telling The Pension Service you wish to defer your State Pension
If you haven't yet claimed your State Pension but you know you want to defer taking it, you don't have to contact the Pension Service until you want to start claiming it.
If you're already getting your State Pension, but you would like to stop claiming it to earn extra State Pension or a lump sum payment, contact your local pension centre. The telephone number will be on any letters you have received from The Pension Service - or you can search online below from The Pension Service website.
Get contact details for your local pension centre from The Pension Service website
