Defer State Pension?

LittleGreyCat

Quick financial run down.

I have an index linked pension in payment which pays around £22k.

I have about £4k in investment income.

I will be 65 in just over one year's time.

At that point I should qualify for the basic state pension, which (assuming a 2.5% rise from current) will be just over £6k.

So, income will be roughly £22k +£4k + £6k.
However the higher rate tax band now starts just under £32k so this will take me into higher rate tax.

I have a small additional pension pot of about £40k which is in a SIPP - and I can draw this down without any constraint under flexible draw down. It isn't going to buy much of an annuity.

However if I take my state pension, every penny I take out of my additional pension pot (however I do it) will be liable for higher rate tax.

Paying 40% tax on your pension income makes a mockery of any tax relief you might have got when paying in. In this scenario I would have been better off with an ISA.

So it looks as though it might be best to defer my state pension and draw down the cash from my SIPP (to the limit of normal rate tax) until it has all gone then take a cash lump sum from the state pension. (I read elsewhere on this site that a lump sum from your state pension will not be allowed to take you into a higher tax bracket).

Does this seem a reasonable plan?

Also, any idea when the point at which you start to pay higher rate tax will stop coming down? It use to be around £40k! Lowering the threshold every year while inflation is going up every year is just taking the mickey.

Cheers

LGC

greenglide

Err - no. The higher rate tax starts at £32k of taxed income. You add the personal allowance to that and get around £40k as previously.

kidmugsy

LittleGreyCat wrote: »

So, income will be roughly £22k +£4k + £6k.
However the higher rate tax band now starts just under £32k so this will take me into higher rate tax.

Nope. £32k is the width of the higher rate band: you need to add on the personal allowance => approx £42k. Prob solved.

The idea of deferring your state pension and eventually taking extra pension is sound. Effectively you would be using your SIPP to buy an index-linked annuity paying an initial 10.4%. That's outrageously expensive - for the taxpayer. For you it's wonderful.


By the way, what are you doing with investment income that's not tucked away in an ISA?

mania112

You just need to be sure that your pension in payment will remain at £22k pa.

Some bridge the gap between retirement and state pension and subsequently reduce at age 65.

xylophone

http://www.hmrc.gov.uk/incometax/basics.htm

http://www.hmrc.gov.uk/pensioners/understanding.htm

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/301563/Pensions_fact_sheet_v8.pdf

jamesd

It's subject to change at any time but here are the current expected levels above which higher rate income tax is expected to become due:

2005/6: 37,295; 2006/7: 38,335; 2007/8: 39,825; 2008/9: 40,835; 2009/10: 43,875;
2010/11: 43,875; 2011/12: 42,475 2012/13: 42,475 2013/14: 41,450

2014/15: £41,450, of which personal allowance is £10,000
2015/16: £42,285, of which personal allowance is £10,500
2016/17: £43,280, of which personal allowance is £10,500

This assumes that a previously announced 1% increase in the basic rate band will happen in 2016/17 and that the announced increase of the personal allowance from £10,000 to £10,500 [STRIKE]in that year[/STRIKE] will also happen. With two budgets and a general election between now and then this is not something to be treated with high confidence. It's also likely that the trend of having the threshold increase by less than inflation so that more people are subject to higher rate income tax will continue.

Deferring claiming the state pension is a good deal for those in normal good health, a 1% increase for every 5 weeks for those who reach state pension age before the flat rate system comes in and for deferral before that happens. The lump sum instead of higher income option is usually not as good a deal as the higher income and in your case that would be true if your health is OK. Even higher rate income tax would not be enough to change this.

You would not be better off if you had used an ISA because an ISA doesn't pay you tax relief on the way in then let you take out 25% of the money tax free, with the rest taxed at the often lower income tax rate that people face in retirement.

xylophone

The personal allowance 2015-16 is scheduled to be £10,500?
http://www.everyinvestor.co.uk/news/2014/03/19/personal-tax-allowance-increases-10500-next-year-7609/

jamesd

Thanks, you're right, my notes said one thing but the reference I had showed what you wrote.

kidmugsy

jamesd wrote: »

Thanks, you're right, my notes said one thing but the reference I had showed what you wrote.

Notes, jd? I had assumed that everything came from your mighty memory.:)

LittleGreyCat

Phew!

When I looked at tax rates from the IR I focussed on the table which started at £0.

I completely missed the paragraph above

"How much Income Tax you pay
After your allowable expenses and any tax-free allowances have been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands."

That makes life much simpler.

However the advice about deferring state pension also makes that route look attractive.

Cheers

LGC