Tax on pension

kidmugsy

It's a pity that the expression "marginal rate [of tax]" has been misused so much over the past year, because this is a genuine example of a sum being taxed at the recipient's marginal rate of income tax.

HarryD

I assume the reason for the lump sum being taxed at your marginal rate, whereas your old age pension would, if taken annually, add to your income and so could push you into a higher tax bracket, is as follows.

If your old age pension is, say, £5K a year, it is unlikely that this would push you up into the next tax bracket. So, if you're a poor OAP, total income including the pension will be below the 20% threshold, so you'll pay no income tax.

If you're better off, and a standard rate taxpayer, it's unlikely that the £5K would nudge you over into the 40% bracket. I.E. the chances are your annual old age pension would be taxed at the same rate as your other income.

From this starting point it would be "unfair" if, by taking your pension as a lump sum, it would be taxed at a higher rate than if you had taken it every year.

Though, as we have seen, this act of "fairness" can throw up (rather nice) anomalies for people whose other income places them just below a tax threshold.

kidmugsy

HarryD wrote: »

From this starting point it would be "unfair" if, by taking your pension as a lump sum, it would be taxed at a higher rate than if you had taken it every year.

I doubt it's anything to do with "fairness" and I certainly hope it isn't. It's to do, I should think. with the desire not to erect a disincentive to deferring the pension.

jamesd

kidmugsy wrote: »

Could the extra pension be a good deal even for them if they have a widow to "inherit" most of the extra pension?

Yes, since this is a case where state pension age was reached before the flat rate come in, something like 50-70% of the increase will be inheritable, depending on the particular years and balance of basic and additional state pension involved and whether the spouse hits the cap on additional state pension allowed. This won't apply to those who reach state pension age after the flat rate comes in.

kidmugsy

jamesd wrote: »

… where state pension age was reached before the flat rate come in, something like 50-70% of the increase will be inheritable, depending on the particular years and balance of basic and additional state pension involved and whether the spouse hits the cap on additional state pension allowed.

For my widow I reckon 90%. I was contracted out for much, but not all, of my career. I hope I'm right, otherwise I should stop deferring.

Hercules_Grytpype-Thynne

jem16 wrote: »

By having taxable income less than the personal allowance.

Yes, I see that now, thank you. Dear oh dear I know nowt.

jamesd

kidmugsy wrote: »

For my widow I reckon 90%. I was contracted out for much, but not all, of my career. I hope I'm right, otherwise I should stop deferring.

That doesn't seem unreasonable given that fact. This is an area where I tend to deliberately lowball the inheritance part, to reduce the chance that I might overstate what random readers might get.