State pension deferral??? help needed please

jamesd

i!!!!!!!!!!! wrote: »

when she applied she got a letter asking if she wanted to defer for 2 years. she had sent the form back saying no as her partner isn't in the best of health so the lump sum would be of a greater benefit to her than extra each week.

someone from the pension service contacted her to say that she would be better to defer as this would mean she would get a greater lump sum.

The person from the pension service is correct. She should choose the option of deferring until 9 Jan.

When the state pension is deferred - including just by not asking for it - there are two main options later on:

1. Take a higher pension, increased by 10.4% for each year of deferral.
2. Take a lump sum which includes the total amount of money that would have been paid over the deferred years plus interest.

It's also possible to claim for back payments from an earlier date.

The lump sum in 2 is a better deal than saying she doesn't want deferral, just back payment from the original years. So you should say yes, defer and take lump sum, because that will pay more than saying no to the deferring question.

It is not necessary to defer for whole years, the increased lump sum and interest is pro-rated for parts of a year. The best choice for him is to start the claim as late as possible because that will pay a bigger lump sum - because deferring pays more than back payments.

So the state pension person was being helpful, telling her which way of doing it will get most money out. So do that, deferring up to 9 Jan. Yes, the lump sum will be paid, and a bigger one than from not deferring, so it's pure gain by giving the 9 Jan date.

It's a bit confusing until you understand how it works but once you do it's easy to know that defer as long as possible is the one that pays most and the best choice. So thank the pension folks for suggesting the best way to do it, they have helped to get more money.

iluvfreebies

that really helps me thanks so much - i didn't realise that when deferring you can still get a lump sum


ill try to get a letter drafted up for her


thanks again for all your help

jamesd

Before drafting that letter, please say a bit more about his income. Is it possible that his income this tax year will be lower than his personal allowance?

The reason I'm asking is that the lump sum from deferring is taxed at the same rate as the highest rate being paid in the year. If the taxable income from other sources is less than the personal allowance, it all ends up tax free.

This matters here because if he starts the claim from 9 Jan he'll get payments from then until 5 April in this tax year. So that plus his other income will be the one used for working out the tax due. What this means is that it might be better to wait until later in the tax year so he'll have lower state pension income this tax year. Then he'll get that income back in the lump sum, but possibly tax free.

It all depends on how much his income is, so if you can say more about that it'd be helpful. If he has a work pension that pays say £10,000 or more a year, no need to answer because it won't make any difference unless he's close to £40,000 in income.

iluvfreebies

he hasn't worked for a number of years and i think he received incapacity benefit or something like that (i don't know an awful lot about his circumstances to be totally honest) i think my aunt just wants to get it done and out of the way at this point.


does this sound ok for the letter?


Can you please take this as notice that I wish to claim my state pension from the 09/01/2014. I wish for any payments due from my 65th birthday (02/09/2010) to be treated under deferment and paid as a lump sum payment as appropriate. Should you require anything further from me please feel free to contact me using the details above.


Many thanks for all you help in getting the matter resolved


if theres anything else you think i should include please feel free to advise

jamesd

That letter looks fine.

However, incapacity benefit could mean that he's within his personal allowance until the state pension starts. Starting it from 9 Jan instead of waiting until say mid March, but still before 5 April, could cost him £2,400 or more in avoidable income tax (calculated at £115 a week for two years, he may well be entitled to half as much again, or more).

Does she really want it done so much that she's willing to have him lose £2,400 instead of doing a bit more checking of his income level to see if he'll still be within his personal income tax allowance? That's a lot of money to possibly lose just for not doing some more checking!

iluvfreebies

ill try to explain the benefit of waiting to her and let her decide if she wants to wait till April shes a little set in her ways and when she sets her mind to something wants it done yesterday lol (typical woman some would say) again thanks so much for your help - that seems like a really good scheme actually now that I know a bit more about it although no doubt there wont be much state pension to worry about when my time comes around

jamesd

It doesn't need to be March. Don't wait until April, has to be done in this tax year to get the tax saving! If you can say what his income has been I can check that and probably say when to do it. Depends on how much income he has, the more he already has and the more his state pension will be, the later in the tax year it'd need to be to get this tax saving.