To defer or not to defer?

2014

Money saving stalwart.
What tax would you pay if you took the £13000 deferred payment after two years.

kidmugsy

2014 wrote: »

What tax would you pay if you took the £13000 deferred payment after two years.

You pay income tax on it at your marginal rate, but it does not raise your marginal rate. So, if you were otherwise paying 20% income tax, you pay 20% on that deferred pension lump sum payment. If you'd given up work with clever timing so that in the tax year when you take the payment you are paying 0% tax, then the payment is tax-free too.

However, for most people the lump sum reward is not as good as the extra pension reward. 10.4% extra on your pension for each year of deferral is wonderful value for anybody who does not have an objective reason to expect a short life. Roughly, after ten years you are in profit (after about eight years if you don't have to pay income tax on the extra pension) and thereafter it's pure gain.

xylophone

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/299286/dwp024-apr-14.pdf
for reference.

JB9302

After reading this thread and advice on others on this forum my wife decided to refer her state pension till she finishes work in Nov 2016 ( been receiving since last August ) .
We had been saving the £520 pm in a cash Isa at 2.25% .

JB9302

Just a thought when my wife started to receive State Pension last year she
paid more tax as she was/is still working , does she need to inform anyone regarding less taxable income .?

Thanks

greenglide

She doesn't have to, it will sort itself out at the year end.

If she wants the tax reduced now she needs to tell HER as the state pension is taxable but not taxed at source so her tax code should be changed.

I think the DWP systems will inform HMRC of the new rate of SP (zero) but you can never guarantee this.

SallyG

http://citywire.co.uk/money/government-to-halve-bonus-to-those-who-delay-their-state-pension/a689798

"Pensions minister Steve Webb (pictured) has announced plans to change these rules and reduce the amount of extra pension received to 5% a year, which will save the government £300 million a year in 2030.

Although the extra income boost is supposed to incentivise people to remain in work, Webb said there is no evidence that this is the case. He has tabled an amendment to the Pensions Bill that will reduce the rate from April 2016, alongside the introduction of the £144-a-week single-tier state pension.

‘We propose that for every 10 weeks a person defers taking their pension, they get an extra 1% on their pension,’ said Webb. ‘I rounded that up crudely to state it as 5% a year, as opposed to the current figure, which is about 10% a year.

‘We are therefore halving the advantage given for deferral.’

Is this going ahead?
If so will it affect people who have already deferred at the 10% rate?

greenglide

If so will it affect people who have already deferred at the 10% rate?

The normal way these sort of changes are implemented is to cut the rate for all new deferments / suspensions from the applicable date so that all deferments from 6/4/2016 are at the new rate as are all new suspensions / de-retirements from the same date. This would protect people who had already signed up.

But this is only an opinion at this stage.

Jaycee_Dove

I suspect if they tried to implement it to those deferring under the old pension rules then there might be a strong legal case that they must therefore treat these people under the new pension rules as to the amount they should get. Thus, if it is more under the new scheme, they should pay more.


So I very much doubt they will risk that kind of double whammy on those choosing to defer to try to smooth out the inequity over the new flat rate - such as poorly paid self employed and women who took time out as carers.


That would not create good headlines for any new government in 2016.


The only way this makes sense is for if your pension is calculated under the old pension rules = old deferral rate, if under new pension rules = new deferral rate. Mix and match would create unwanted headaches and headlines I suspect.


A lot of existing pensioners missing out on the new flat rate will be angry already. They might have identical records but already getting less because of the cliff edge where someone born at 5 to midnight the night before the cut off date could get £25 per week less - arbitrarily - than someone born 10 minutes later at five past and under the new rules would be doing. So their anger would be rightly hugely exacerbated if they were denied the better deferral deal as well.


So surely no government would be idiotic enough to engage that serpent of doubly angered wrath.

greenglide

But there are both winners and losers under STP so it is not that simple.

In practice there cannot be that many people who suspend / De - retire so setting the new rate for all new deferment or De - retirements from 6/4/2016 is simple and straightforward and follows government practice.