Taxation Readers’ Forum: Pension dilemma

Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about recycling a state pension into a private pension.

‘My client is a higher rate taxpayer aged 65 who is in full-time employment and is likely to remain so for a few more years. He will be entitled to his state pension when he reaches the age of 66 later this year.

One option he is considering is deferral of his state pension until he either ceases employment or reduces his working hours down to a level at which he pays only basic rate tax. He has asked me whether it would be better for him to draw the pension when he reaches 66 but then contribute the full amount of the state pension into his private pension (subject to the annual allowance and total pension fund limit).

He would pay higher rate tax on the pension but receive higher rate relief on the contributions to the private pension and so the two amounts would cancel each other out.

From an investment point of view this comes down to whether or not there would be a better return on the additional private contributions than he would get from the higher amount of state pension which he will receive when he ceases the deferral.

The question for me is whether there are any restrictions preventing him recycling his state pension into the private pension. I know that there can be restrictions where tax free lump sums from pensions are recycled but are there equivalent rules for the state pension?

I look forward to readers’ assistance.’ Query 19,895 – Cyclist.

Terry Jordan’s reply: Client can contribute state pension after tax to his private pension

Cyclist’s client is considering deferring his state pension past the age of 66. The rules for people who reached state pension age before April 2016 were much more generous and included the option to take a lump sum.

Under the current rules, each nine-week deferral adds 1% or 5.8% for a year’s deferral when the pension is taken.

It has been calculated that the break-even point is 17 years after drawing the deferred pension and the client (or more accurately his estate) could be worse off should he die prematurely.

It is possible to take the pension then stop it but once restarted that is it. It should be noted that the state pension is not paid automatically and needs to be claimed.

Subject to the normal £40,000 annual limit (with possible carry forward of unused allowances) and the amount of his earned income there is nothing to prevent the client taking the state pension and contributing the net amount after tax to his private pension with tax relief.

The government has proposed that people over state pension age should pay 1.25% National Insurance contributions on their earned income from April 2023 as part of the social care package.

It is also worth considering the inheritance tax implications of the client’s decision. As a rule, nowadays private pension funds do not suffer inheritance tax. Should the client die before the age of 75 the recipients could access the fund tax-free and if he should die aged over 75, they would pay income tax when benefits were taken. Accordingly, the strategy could form part of the client’s estate planning. Alternatively, he could claim and give away the net state pension and such regular gifts would be immediately exempt under IHTA 1984, s 21 (normal expenditure out of income) as long as there was a demonstrable pattern of giving or the commitment to give regularly could be evidenced at commencement.’

The article is also available on the Taxation website.

Our private client tax team have expertise in a range of areas including inheritance tax, trusts and family wealth. For more information, please get in touch with your usual BKL contact or use our enquiry form.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

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While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


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