Service Pension Reduction

[Al R]

Let’s start with the basic answer. The state pension is taxable, although it is paid without tax being deducted. This makes life easy for non-taxpayers but can create a headache for those who have other pensions or do paid work. In order to put your affairs straight, HM Revenue & Customs must, if your income is high enough, adjust your tax code and take extra tax from another pension or an employer.

.. which is why retirement/pension planning for a non tax paying spouse/civil partner is so important. We all have an annual income allowance of (this year) £8105, or £10,500 if you're 65. The part a spouse (usually a wife) can play without realising it is huge, especially if you extrapolate matters over 30 or so years. Instead, invariably, a spouse's tax free annual allowance goes begging and is lost forever.

Rather, the money which goes into the retired household is invariably in the name of a male wage earner who has accrued an attractive military pension and then typically, an airlines and state pension which then gets taxed far too heavily and needlessly. Many retired officers and SNCO/WO will still be Higher Rate Tax payers in retirement (even more if the Lib Dems have anything to do with it); imagine paying 40% tax on £10,500 needlessly for 30 years.

Uncrystalising (or not using) a partner's personal pension has benefits too, in terms of estate/tax planning. One possible solution? Instead of AVCs/added years for your AFPS, consider diversifying and making best use of a partner's allowances. Finally, that letter mentions a 'private' (personal?) pension; it seems the writer had instead, an occupational pension. In this instance though, the type of pension would have little bearing on his predicament.