State pension query

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
9 replies 1.8K views
ipriipri Forumite
649 Posts
hi...I will be receiving St. pension next May. I am in the higher rate tax band. I presume that pension will be taxed before I get it....will that be at 40% rate....or will it be 20%.....left to me to contact HMRC to inform? thanks.

Replies

  • le_louple_loup Forumite
    4K Posts
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    No. It will not be taxes at source. Your tax code will reflect this and the tax - if applicable- will be deducted from your other income.
  • McKneffMcKneff Forumite
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    Part of the Furniture 10,000 Posts Name Dropper
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    just to support le loup's answer is correct.
    make the most of it, we are only here for the weekend.
    and we will never, ever return.
  • lynnejklynnejk Forumite
    5.7K Posts
    Rampant Recycler Debt-free and Proud!
    Hiya
    I am still working and so would pay tax on my pension.


    I thought it more prudent to defer my pension until such time as I need to take it.


    That way I am not paying excess tax but also earning over 10% each year on my pension. I don't see anywhere else you can earn this amount on savings :) Then I will have the choice of a lump sum or increased pension for the rest of my days.


    I know it doesn't work for everyone but I would be interested in your thoughts and comments
    Lx
    £10day.2014=3213/2015=3421/2016=3238/2017=2702/2018=498..APR=12.03/300
    GrocC.2014=2162/2015=2083/2016=218/2017=1996/2018=450..APR=17.13/200
    Bulk buy.......APR=233.76
    GC.NSD..2015=216/2016=213/2017=229/2018=39..APR=03/15
    SPC130:staradminx61..2014=1178/2015=1287/2016=4616/2017=3843
    OS WL= -2/8 ......CC =00......Savings = £13,140
  • lynnejk wrote: »
    Hiya
    I am still working and so would pay tax on my pension.

    I thought it more prudent to defer my pension until such time as I need to take it.

    That way I am not paying excess tax but also earning over 10% each year on my pension. I don't see anywhere else you can earn this amount on savings :) Then I will have the choice of a lump sum or increased pension for the rest of my days.

    Sounds good to me.

    There was a rule that if you deferred your state pension and took what you deferred as a lump sum, the lump sum would be taxed at the highest rate you are paying in that year on your other income.

    So, if your other earnings are £1 below the 40% threshold and you took £50,000 state pension lump sum you would only pay 20% on the lump sum.

    Is that rule still in place or have they changed it?
  • xylophonexylophone Forumite
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    Part of the Furniture 10,000 Posts Name Dropper
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    https://www.gov.uk/tax-on-pension/how-your-tax-is-paid

    The OP should check his code to make sure that the correct amount of tax is being deducted-if a higher rate tax payer and receiving interest or dividend income, he will also need to contact HMRC.
  • lynnejklynnejk Forumite
    5.7K Posts
    Rampant Recycler Debt-free and Proud!
    Binky1976 wrote: »
    Sounds good to me.

    There was a rule that if you deferred your state pension and took what you deferred as a lump sum, the lump sum would be taxed at the highest rate you are paying in that year on your other income.

    So, if your other earnings are £1 below the 40% threshold and you took £50,000 state pension lump sum you would only pay 20% on the lump sum.

    Is that rule still in place or have they changed it?
    I haven't seen any change so far and have been watching for this to be closed. If anyone knows better please respond.


    You also can play a bit with when you cash in according to your tax situation
    Lx
    £10day.2014=3213/2015=3421/2016=3238/2017=2702/2018=498..APR=12.03/300
    GrocC.2014=2162/2015=2083/2016=218/2017=1996/2018=450..APR=17.13/200
    Bulk buy.......APR=233.76
    GC.NSD..2015=216/2016=213/2017=229/2018=39..APR=03/15
    SPC130:staradminx61..2014=1178/2015=1287/2016=4616/2017=3843
    OS WL= -2/8 ......CC =00......Savings = £13,140
  • ipri wrote: »
    hi...I will be receiving St. pension next May. I am in the higher rate tax band. I presume that pension will be taxed before I get it....will that be at 40% rate....or will it be 20%.....left to me to contact HMRC to inform? thanks.

    Depends how far into the 40% band you are, and what you already do, etc but...

    You could take whatever (gross) income you currently pay 40% tax on, add the gross amount of state pension and put the resulting amount (actually 80% of that amount net) into a SIPP each year. So you take your state pension but pay no 40% tax on it (or on anything else).

    Then when you do retire and your earnings fall below the 40% threshold, take 25% tax free cash from the SIPP plus (each year) however much income you can such that you do not go into the 40% tax bracket.
  • SeekTruthSeekTruth Forumite
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    Binky1976 wrote: »
    Depends how far into the 40% band you are, and what you already do, etc but...

    You could take whatever (gross) income you currently pay 40% tax on, add the gross amount of state pension and put the resulting amount (actually 80% of that amount net) into a SIPP each year. So you take your state pension but pay no 40% tax on it (or on anything else).

    Then when you do retire and your earnings fall below the 40% threshold, take 25% tax free cash from the SIPP plus (each year) however much income you can such that you do not go into the 40% tax bracket.

    I was intrigued by this reply, so thought I'd calculate some numbers. Of course, I don't know the OP's situation so have made a number of assumptions, most carefully selected to simplify the numbers!

    I have considered 4 options:
    Option 1: take state pension when due.
    Option 2: defer state pension for 1 year and take lump sum
    Option 3: defer state pension for 1 year and take increased pension
    Option 4: take state pension when due and put into SIPP

    Assumptions:
    1. entitled to £5000 state pension, all basic (zero SERPS/S2P)
    2. in 40% tax band for 1 year, then 20% regardless of option adopted
    3. all figures in today's money
    4. interest on state pension lump sum when deferred exactly counteracts inflation
    5. increased state pension per year of deferral 10%
    6. investments in SIPP grow in line with inflation
    7. no charges for taking money from SIPP

    First take Option 1 as the baseline against which the other options will be compared.

    Option 2 v Option 1
    Con: lose £3000 income over 1st year
    Pro: gain lump sum of £4000

    Option 3 v Option 1
    Con: lose £3000 income over 1st year
    Pro: gain £400 pa pension for rest of life, 100% inheritable by spouse/civil partner

    Option 4 v Option 1
    Con: lose £3000 income over 1st year
    Pro: gain pension pot of £5000 (£1250 could be taken tax free, £3750 to be taxed at 20% when taken - total received £4250)

    Which option is preferable obviously depends on the person's detailed situation and the attractiveness of long-term guaranteed income compared with cash now or in near-future.
  • Thank you for this very interesting calculation. It just shows how it helps to be really clever and able to do complicated sums if you want to save on tax!
    Healthy Living & Green Energy
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