State Pension deferral

baz.jaq

My wife deferred her pension January 14, she continues to work part time. She is a non tax payer as she earns approx £7000 per year. If she draws her deferred pension now as a lump sum (£7250) I guess she will pay tax on everything over £10000. She is retiring at some point in 2015 but hasn't decided when exactly. So is it better to take the money today or wait until the new financial year. She prefers the lump sum rather than the bigger pension.

xylophone

See http://www.litrg.org.uk/tax-guides/pensioners-tax/what-tax-do-i-pay-on-my-state-pension-lump-sum

kidmugsy

baz.jaq wrote: »

My wife deferred her pension January 14, she continues to work part time. She is a non tax payer as she earns approx £7000 per year. If she draws her deferred pension now as a lump sum (£7250) I guess she will pay tax on everything over £10000. She is retiring at some point in 2015 but hasn't decided when exactly. So is it better to take the money today or wait until the new financial year. She prefers the lump sum rather than the bigger pension.

Be careful! The lump sum pays tax at the tax rate of the highest of her other income. So, if late in this tax year if she will have earned £7k and will have got a restarted pension of (say) £600 in tax year '14-'15, then she wouldn't be a taxpayer and her lump sum would be tax-free. But if she cashed in the lump sum at the beginning of next tax year and then worked on until nearly the end of that tax year, her income would be (approx) £14k, so she would be a 20% taxpayer and the lump sum would all pay 20% tax.

In other words, the best strategy for the lump sum is to take it so late in a tax year that she is undoubtedly not a taxpayer in that tax year. (Mind you, I'm a bigger fan of the extra pension rather than the lump sum, but each to their own.)

DancingBadger

She prefers the lump sum rather than the bigger pension.

I agree with Kidmugsy.

Unless you/your wife have some pressing need for the lump sum (debt repayment, for example) the received wisdom is to take the higher pension. An extra few pounds a week might seem insignificant compared to a nice lump sum, but the annual increases they attract build up very quickly once compounded. If your wife is in good health and you don't have a need for the money, the increased pension is a "no brainer" (as they say).

baz.jaq

Thankyou both, food for thought! We will be using the cash to help purchase a motorhome but not in a hurry hence the enquiry.

jamesd

Why not take out a loan to buy the motor home? Deferring and taking the income pays 10.4% a year in higher income and she can use that extra income to pay the loan. It's probably not too hard for you to borrow at a rate below that and the loan will be for a shorter time than the higher income, probably.

PlutoinCapricorn

On the other hand, some people say take what you can while it is available. All the more if there is a year in which no tax is payable.

kidmugsy

PlutoinCapricorn wrote: »

On the other hand, some people say take what you can while it is available.

And remarkably many of them say it without even attempting any arithmetic on the question.

saver861

kidmugsy wrote: »

And remarkably many of them say it without even attempting any arithmetic on the question.

... and there are those who seem to be convinced deferral is the best option regardless of whatever the arithmetic produces ...

mgdavid

saver861 wrote: »

... and there are those who seem to be convinced deferral is the best option regardless of whatever the arithmetic produces ...

what makes you say that? Certainly none of the replies in this thread...

saver861

mgdavid wrote: »

what makes you say that? Certainly none of the replies in this thread...

If you look back to post number 7 you will see it is a generalised quote rather than specific ... thus responses followed on.

On another thread I did have some debate about the merits of deferral. The consensus seemed to be that unless you agreed deferral was a good thing, you are probably arithmetically illiterate.

While some people are under the illusion that if you defer you will benefit in 9.6 years onwards - as that is the supposedly break-even point. I merely sought to clarify that
a) it is 10.6 years from pension date
b) if you go into tax paying mode from non tax paying on receipt of pension then that will extend reaching the break-even point.
c) if you invested the years non-deferred pension that would extend the break-even point even further.

Thus, it could be as much as 14 years from pension date. If you live long enough that still could be a good deal. However, there are many situations where the benefits of deferral are not as valid as the sweeping statements about deferral might lead some to believe.