State Pension deferal

The_Shadow

I am a male aged 65,and in the 40% tax bracket, i have decided to carry on working with my curent employer for another at least another 12 months.

I am currently taking a small pension £326 per month (less 40% tax) gives £196 per month.

I also have my current company pension which i am still paying into. The pot is about 55K. I will be taking 25% out as a lump sum.

I decided to defer my state pension for 12 months,

Could any one please advise if i would be better taking an increase in the state pension 10.4% or taking the lump sump.

If i take the lump sum when would be the best time to take it to avoid paying the 40% tax.

Thanks in advance for any help or advice

whiskyman

Hi Shadow

If you defer for at least 12 months then you may get either a one off taxable lump sum of the pension that you have deferred plus interest at the Bank of England base rate plus 2% or an increment on you pension of 10.4% for every full year pro rata for part years.
If you pension was £100 per week you would after 12 months have a lump sum of £5200 plus interest or a pension of £110.40 per week. Just look at those figures and if you take the increment it will take almost 10 years to recoup the £5200.
If you take the lump sum it is taxable but you may choose to take it in the next tax year. Work out what your income is going to be and remeber that at age 65 you tax allowances will increase. If without the lump sum you would only pay 20% tax then the lump sum can not put you into a new tax bracket even though the income would appear to put you in this tax bracket. so if someone had deferred their pension for 10 years and got a lump sum of £60,000 but their normal income for the tax year is below their tax allowances they would not pay any tax on the lump sum.
I hope that is clear.

The_Shadow

Hi Whiskey man , many thanks for your responce.

I am aged 65 my tax code is 717L

Undefered State pension will give about £159 per week other pensions will give about £520 per month.

Based on the above figures, I would prefer to take the lump sum

Any additional advice would be very much appreaciated ( not very good with acounting and tax affaires)

Thanks in advance

hugheskevi

Could any one please advise if i would be better taking an increase in the state pension 10.4% or taking the lump sump.

In terms of which gives the higher expected value (assuming normal life expectancy), the higher State Pension is better. However, depending on financial requirements, the capital provided by the lump sum may make that more desirable. Given what you have said so far, I would have thought the higher State Pension would be more desirable for you.

Undefered State pension will give about £159 per week other pensions will give about £520 per month.

Once you have left work in a year's time, you will have a Personal Allowance of £10,500. Income over £25,400 will lead to a reduced Personal Allowance, which means you effectively pay a higher rate of income tax.

Your income would seem to be around £14,500 p/a once you have left work, so you are will be paying 20% tax on all extra income and there would seem to be little risk of increasing income past £25,400 p/a.

I would think you should not only consider deferring State Pension, but also putting extra into private pension to avoid higher rate tax (and more if you have access to salary sacrifice).

Bradfield

The_Shadow wrote: »

Hi Whiskey man , many thanks for your responce.

I am aged 65 my tax code is 717L

Undefered State pension will give about £159 per week other pensions will give about £520 per month.

Based on the above figures, I would prefer to take the lump sum

Any additional advice would be very much appreaciated ( not very good with acounting and tax affaires)

Thanks in advance

Hi Shadow

There are so many variables but I will give a sort of hypothetical example which I hope may be of some assistance.

Let us suppose I have a private pension that amounts to £6240 per annum. I have a personal tax allowance of £10.500 per year so I am not liable to pay income tax, at that time.

I have also deferred my state pension and am now deciding when to start claiming my pension and receive the lump sum.

The state pension amounts to about £159 per week. When should I start to claim it?

If I start to receive the state pension in the first week of the tax year then at the end of the year I have added an extra £6399 to my income and will pay tax both on my income and on the lump sum.

However, if I dont claim my pension until the last week of the tax year then I have only added £129 to my income for that year and hence pay no income tax for that year and hence no income tax on the lump sum.

Thereafter, of course, you will pay tax on the income from both your pensions. Just something to think about.

jamesd

In general the optimal choice for men in normal health is to defer for two to three years and take the higher income. For women it's three to five years.

If you have any indications of adverse health that could seriously reduce your life expectancy then the lump sum may be preferable. However, even if you have those risk factors it can be useful to treat the pension as a form of insurance against living longer than expected and take higher income. Normal life expectancy today is for half of 65 year olds to live until they are 86-89 years old or older and the death rate is quite low for the earlier ages.