State Pension Lump Sum

middlepuss

When you are retire, your company/personal pension + investment income might be just below the 40% tax threshold. In these circumstances, when you start to receive your state pension it would push you over the 40% threshold. For example, if your other income was £1 below the 40% threshold, then all of your state pension would be taxed at 40%.

However, if you defer taking your state pension, and after a year or more take your saved-up state pension as a lump sum, then even if your other income in that year was only £1 below the 40% threshold, the lump sum would only be taxed at 20%!

This seems too good to be true. Have I understood it correctly?

http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/DG_179996

atush

I an mot sure, I thought the lump sum for a deffered SP was considered income.

In any case, in your scenario your lucky pensioner could have taken the Max lump sum and put it into ISAs to lower taxable income, and can still contribute into a PP to keep themselves under the HRT limits and immediately vest the pensions each year.

hugheskevi

Yes, you have understood it correctly.

The intention is that taking a lump sum of, say, £20,000 for someone with an annual income of £25,000 of pension shouldn't push someone into higher rate tax - if such a person had taken pension rather than deferring they would have paid basic rate.

The flip side is, someone in the position you describe does particularly well out of the arrangements.

middlepuss

hugheskevi wrote: »

Yes, you have understood it correctly.

The intention is that taking a lump sum of, say, £20,000 for someone with an annual income of £25,000 of pension shouldn't push someone into higher rate tax - if such a person had taken pension rather than deferring they would have paid basic rate.

The flip side is, someone in the position you describe does particularly well out of the arrangements.

Thank you.

BoGoF

If you are near the 40% limit then you need to remember that the weekly state pension you receive from the date you decide to take the deferred lump sum is taken into the equation.

middlepuss

BoGoF wrote: »

If you are near the 40% limit then you need to remember that the weekly state pension you receive from the date you decide to take the deferred lump sum is taken into the equation.

Yes, good point.

Having deferred, and taken a lump sum, I guess you then have to draw the pension in the normal way? I.E. you can't take a lump sum, then defer again and take another lump sum a few years later?

hugheskevi

Having deferred, and taken a lump sum, I guess you then have to draw the pension in the normal way? I.E. you can't take a lump sum, then defer again and take another lump sum a few years later?

You are allowed to de-retire (ie cease receiving State Pension) once under current rules, so as it stands you could do this.

However, if you did then it is the sort of thing on which the rules could change, possibly without much notice, so you would need to keep an eye on it.

jamesd

It's worth looking hard at the income to see what income can be arranged to be untaxed, if any.