Becky O’Connor Pensions Doctor

‘Can I start a private pension and benefit from the tax advantages at the age of 67?’

QI’m 67 and have been in receipt of the full state pension since April 16 last year. I have a teachers’ pension, which I have not yet taken as it’s not tax- efficient to have that while I’m still working.

So I’ve been deferring my pension for more than seven years. I understand that when I do finally have it, the initial lump sum is not taxable but the consolidated payments and ongoing pension would be taxed.

As a self-employed peripatetic worker my tax deductible expenses are quite high and more or less wipe out my tax liability. But between my teachers’ pension and the state pension, my income tax free threshold will be wiped out.

So I’m wondering whether there is a way that I can use some of my surplus income to start a private pension at my age, and if so, whether there would be tax advantages, or whether it is too late to think about a private pension and the best I can do is use Isas to avoid paying more tax than necessary.

Thank you for any suggestions. – Laura

Dear Laura

AYes, you could absolutely still start a private pension. Anyone can start a personal pension up to the age of 75. Tax relief on contributions stops at age 75, although you can keep paying in, if you wish and many people do for other purposes, such as leaving an inheritance.

As a self-employed worker, you would get the tax relief on your own contributions and hopefully some investment growth through the pension, but not any employer contributions.

The tax-free lump sum available with pensions ( the maximum is now £268,275) could swing your decision in favour of pensions rather than Isas, if you did want to keep saving.

As a crude example, basic- rate tax relief at 20pc would mean that for every £1,000 you put in personally, £1,250 goes into your pension. If you are paying basic-rate income tax when you start to draw on this pension, then 25pc of that £ 1,250 ( or whatever it had grown to through investment returns) could be taken as a tax-free lump sum – £312.50 – and the remaining £ 937.50 would be taxed at 20pc to provide £750 net income, resulting in a total of £ 1,062.50 once added together – although if your investment had grown you would get more.

If you used an Isa instead, £ 1,000 would go in after you’d already paid tax and when you come to take the money out, it’s tax-free, so you’d be on £1,000 of net income, plus investment growth.

If you are concerned about possibly being a higher-rate taxpayer ( income over £ 50,270) once you start taking your teachers’ pension, state pension and any other income from a personal pension, it might make less sense to pay into the personal pension now – as you would face a higher, 40pc tax bill on the money coming out.

After the tax-free lump sum is taken, in the example above, you would pay £375 tax on the money left to take as income, leaving you with post- tax income of £875.

As you have deferred taking the teachers’ pension for seven years, the amount of benefits available to you will have been rising steadily. It’s worth checking your most recent annual statement, if you haven’t already, to see what kind of income you can look forward to. Also do bear in mind that once you start taking a taxable income from your work pension, the maximum amount you can continue to contribute to a pension is £10,000 a year without facing a tax charge – known as the “money purchase annual allowance”.

Another option that is worth considering is pausing your state pension for a while, until you stop working. You can only do this once and then when you resume taking it, your state pension will be higher to reflect the time you weren’t claiming.

Finally, if you do decide to go down the personal pension route, as you are close to wanting to access that pension for income, you would need to consider the type of investment plan carefully.

As a general rule, plans that have significantly reduced exposure to the stock market are less volatile in the run up to retirement, although this doesn’t always hold true.

On the other hand, if you think you can work until you are about 75, and won’t need the money until then, there’s no reason not to have some equities in the mix.

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Becky O’Connor is director of public affairs for PensionBee, the online pension provider. Write to Pensions Doctor with your pension problem: pensionsdoctor@telegraph.co.uk