defering state pension

Lizzybet_2

Hi all, I reached 60 last December, but decided to defer state pension to grow a little as I am in receipt of occupational pension. Has anyone worked out whether, following a period of deferring, it is better to go for the lump sum option, or for the increased weekly amount option? As far as I can see it sort of depends upon how long the person intends to live!! Any ideas?

CIS

It depends on how long the defferal is and what your tax rate is:

With increments
1% for every 5 weeks deferred = ~10.4% p/a
On £80 p/w pension, you give up (80*52) = £4160, to get a pension of~£88 a week if you claim it after 1 yr. So it would take you (4160/8)= 520 weeks to recoup the value money given up , with the extra £8 per week you'd get.

With Lump SUm
on £80 p/w pension, you'd give up £4160 for a years deferral, the lump sum you'd get would be around £4300, you then claim the £4300 + a weekly pension of £80 p/w.
You may be taxed on the lump sum: in the tax yr that you receive the lump sum , it will be taxed at the same rate as thr highest rate of income tax you pay (if your in thr 10% band, it'll be taxed at 10%,22% band at 22%.it works slightly different to normal income tax rules)
To avoid tax , you can claim your lump sum and then have held over until the next tax yr to lower the amount of tax payable on it, but you then dont have use of the money until then.

Heres the pension service website on the issue , along with leafles.
http://www.thepensionservice.gov.uk/resourcecentre/spd/home.asp

Lizzybet_2

CIS, thanks for this - very useful! Sorry to be thick - could you explain a little more please about how to avoid tax on the lump sum; I am currently paying 22%.

CIS

Usually income fro tax purposes is added to gether and the the tax split in to the various tax bands, the lump sum is handled differently.

When you claim the lumpsum, the lumpsum will be taxed at the highets rate of tax you pay in that tax year, for you 22%, That means on a 1yr defferal of £80p/w, you'd be taxed at around £950, a lot when the lump sum is only around £4300.

To get around this, you can claim your state pension and resume the recipt of it, but still have your lump sum held back until the next tax year (you wont accrue anything extra on it for this period) if it is in your benefit tax wise.

For example:
If you claimed your deferred pension in 2006/07, you would probably have to pay the 22% tax on the lumpsum, but what you could do, if you planned to stop work in the 2007/08 tax year , would be to cliam your pension in the 2006/07 yr but hold back your lump sum until the 2007/08 yr when you'd get the lumpsum based on your tax rate in that yr,which if you weren't working would be a lot lower.

You'd also pay less tax if youi claimed a lumpsum on or after your 65th birthday , when your tax code will increase.

Lizzybet_2

CIS, Thank you so much. I understand it now. You're a genius!!.

CIS

No problem, happy to help