Understanding deferred state pension

dizzie

Hi,

I'd be grateful for advice on this if anyone knows how pension deferral works and how it affects other things.

A good friend of ours (single and living alone) will be 66 on 2nd October. She continued working part time when she reached 60 and so deferred her state pension (she won't qualify for full state pension ...and she says her pension forecast is around £75 per week). She will have deferred her pension for 6 years by 2nd October 2014, and was hoping to take this as a lump sum. She won't have any other income when she retires - other than her state pension (so she should get pension credit). She does own her house, so at least she doesn't have any rent to pay. She is getting a little bit of working tax credit at the moment whilst she is working but clearly, when she retires - that will stop and she'll go on to pension plus pension credit.

She has been a bit confused by the advice on the Pension Advisory Service and government websites and asked me if I could look at these and work out how deferred pension works and how it affects everything else. I have to say that having looked on these websites, I'm as confused as she is! The questions I have are:

1. The Pensions Advisory Service and Government websites say that you can't chose to receive deferred pension as a combination of lump sum and increased pension (i.e. a split). If she retires in October, she will have 6 years deferred pension, but if she retires at the end of the tax year (i.e. works about another 5 months), will her lump sum be worked out on 6 years and 5 months deferral or do they just do this in full years. She has telephoned the pension people and has been told that they will pay her 6 years lump sum and a slightly increased pension to account for the other 5 months deferred amount....but that seems to be contrary to what the websites say!

2. Would she be better to defer receiving her lump sum until after 6th April 2015 (i.e. would it complicate matters that she has been receiving a little WTC this year? and would the lump sum be classed as income and result in WTC being clawed back if she did not defer taking it until > 6th April 2015 (She earns well below the personal allowance for basic rate tax so I know that when she takes the lump sum won't matter from a taxation point of view)).

3. Will the lump sum affect her pension credit calculation. She has negligible savings otherwise, but I guess if her lump sum is around £20k then once she gets it....she will try to keep most of this as "savings" as a safety net in case she has any large bills to pay (e.g. needs to replace her central heating boiler or a roof repair). According to the government websites, they say that lump sums from a deferred state pension will be disregarded when they work out pension credit....but then if you do a calculation on their website....it looks that they do include the lump sum from a deferred state pension in the calculation of pension credit (again, this seems to be contradictory and confusing)

Many thanks for any help with this.

zygurat789

First of all you would do well to post this on both the pensions and benefits boards, you may well find that it is moved for you but that will take time.
Secondly the deferred pension which is about 10% pa so a 65% uplift on her quoted pension is very, very good value, far better than anything you will achieve from savings which will go down in value with inflation because the pension will increase in line with inflation.
With regards to 3 above I think it is that the deferred lump sum is ignored as income in the year of receipt but in future years it is savings and so will affect the pension credit calculation.

dizzie

Thanks Zygurat789, I will repost on the Benefits board,

Dizzie

zygurat789

dizzie wrote: »

Thanks Zygurat789, I will repost on the Benefits board,

Dizzie

And the pensions board. You will get a good response on there.

Bradfield

Hi Dizzy,

Yes! It is confusing and sometimes seemingly contradictory. Staff at the Pension Advisory Service are often confused too. Can we blame them?

I have been there and done it so have a bit of experience: but the rules change and you need to double-check everything.

With regard to "Point 1". The lump sum is worked out as one single payment based on the years and months.

2. With regard to "Point 2" it would seem to be best to defer until after April 06 2015 since for tax credits the lump sum is counted as "other income" according to the DWP (Deferring your State Pension, April 2013, Page 21).

3. The lump sum payment will be "completely ignored" in the calculation of pension credit. It is not counted as savings. Just keep the lump sum payment letter as proof.

4. The lump sum payment will be tax free if she pays no income tax on her other income.

The only other thing to be sure of is that there is an underlying entitlement to defer the State Pension. You cannot defer your pension whilst claiming certain other benefits, for example, a Widows Pension or Carers Allowance.

Murphybear

Information on this can be a bit confusing. I have found the clearest source is the Which website for this and lots of other things.