Deferred State Pension

THE-WIFE_3

Good afternoon,

I have researched back on several forum pages and I apologise if this question has been posed before.

My friend, who reaches state pension age in January 2009, has decided to defer his state pension for two years, he has a job that is suited to him and has a regular monthly income from it. He has no desire to cease working just yet, his employer is happy to keep him working.

My question is, would he be better working for an extra three months until the new tax year of 2011-20012 and then claim his deferred pension as a lump sum, i.e, after 6th April 20011 instead of the January? He also has a group personal pension with Standard Life that he and his employer will continue to pay into until he finally retires. His annual income is £20k.

Thank you.

ManAtHome

Hi - think we've had the odd thread but not sure whether this came up.

I've recently been helping somebody to try understand and claim - first comment is that the Pension service call centre is very hit and miss, took several calls to get somebody who (a) knew how it worked and (b) actually did something about it.

Anyway, having seen the forms, you can elect to receive the lump sum either in the tax year when you claim (2010/11 in your case) or the following one. If you chose the current year they should stump up January 2011, if the following one, they will make payment soon-ish after April 6th 2011.

You should pay tax on the lump sum depending on your total income for the tax year selected - income is any pensions (including State Pension), savings interest, rents received etc (excludes some benefits but can't remember what they are). The lump sum doesn't count, but if you stick it in a savings account, any interest you get from it does.

After all that - he could work the full 2010/11 tax year then get the lump sum in the 2011/12 tax year, although it will make no real difference if he will be paying the same rate of tax (standard or higher-rate) due to State + other pensions after retirement.

Hope that all makes sense.

THE-WIFE_3

thank you for your time, Manathome.

I just wondered whether he would be better off claiming in the new tax year as the lump sum (about £12k) would form part of his income and whether this would be taxed considering his tax code would be that of a single man. But I've answered my own question here, as you so kindly have, as it will be part of his income for the year and would be treated the same as if he had claimed in January. He'll be getting his lump sum and his state and gpp pensions and still be paying tax but under the 40% threshold.

Doh!

ManAtHome

The lump sum isn't treated as income, so depends on whether he can get his cash from other sources below £6000 ish for either tax year. Sounds unlikely as his State pension will probably use up his personal allowance (could be £7000 ish by the time he retires, but State pension also likely to be up 10% by then).

The one I went though had no income other than State pension and savings interest - they had 7 months SP in this tax year, total around £5000 so they got the lump sum tax free (so far...). If they'd waited until next year, the pension for the full year plus savings interest would have taken them into basic-rate tax, so the lump would have been taxed at 20%.