Transfer drawdown to State pension top up

olly50

I am interested in topping up my state pension, which I should receive when I am 65 in Dec 2015, I should receive the full state pension of around £115 per week.
My understanding is that from October 2015 I can make a payment to top up my state pension. A payment of £22,250 should be able to top up the state pension by £25 per week.
I have about £22000 in a pension that is currently in drawdown( I have already taken the full tax free lump sum), can I use this for the top up?

Bazofts_Revenge

Is this your only private pension?

Have you looked at your life expectancy?

You could withdraw £25 a week for the next 17 years and still have money left over as I expect it would grow a bit!

You could withdraw the value of your Personal tax allowance £10-11k -(state pension +others income if any) each year (and pay no tax) Place this money in an ISA and then pay no tax on any income or capital growth that this generates. You can then leave this to an beneficiaries/dependents when you pass away.

If you give it to the government you will have to live beyond 82 to be in front.

kidmugsy

Deferring your state pension is much better value than the top up. For every year of deferral you get an extra 10.4% Extra Pension. Live off your drawdown in the meantime. For males, people like to suggest that a deferral of 1 - 3 years is about optimal. Note that your widow can inherit most of your Extra Pension but not of your top up. Two years of deferral will earn you about an extra £1200 p.a. at a cost of £12k forgone. That beats paying £22k for only a smidgen more.

Depending on what other income you have/will have, it can also be mighty tax-efficient.

olly50

I am already taking my company pension of £12000 p.a. plus I have some savings in ISAs, my wife is already receiving state pension.
Your replies lead me to the following conclusion: The best long term safe option would seem to be, I defer my state pension for 3 years and use the £22000 drawdown(about £7300 p.a.) to cover the state pension I would have received.

jamesd

olly50 wrote: »

I am interested in topping up my state pension, which I should receive when I am 65 in Dec 2015, I should receive the full state pension of around £115 per week.
My understanding is that from October 2015 I can make a payment to top up my state pension. A payment of £22,250 should be able to top up the state pension by £25 per week.

You're too young for the top-up deal to be a good one. It's appropriate for those nearer to the age 80+ range.

For younger people the option of deferring the state pension is a better one, increasing your state pension by 10.4% for each year you defer, pro-rated for less than a year. Compare that to the 25*52 for £22,250 which is an increase of only 5.84%. So deferring gets you almost twice as much of an increase for your money.

olly50 wrote: »

I have about £22000 in a pension that is currently in drawdown( I have already taken the full tax free lump sum), can I use this for the top up?

Yes. If you still want to use it for the top up you'll need to take it as income and will need to claim some tax back from HMRC because of the rules about how pension providers have to deduct income tax for a lump sum.

If you defer your state pension instead just set the income level to be what your state pension will pay so you still have that income, just from a different source.

A person who has already claimed their state pension can defer once. If you and your wife are of similar health and she isn't also deferring, it would probably be a good idea to balance out the total deferring roughly evenly between you, because the gain from deferring gradually drops as the number of years of deferral increases. So two people deferring for one year beats one person deferring for two, if both are in the same income tax situation and otherwise the same.

If you or your wife isn't an income tax payer, it'd be better to defer for the one who has no income tax to pay. 20% income tax you can avoid paying, a good deal. Provided health is OK. Ages also have to be considered but I'm assuming her age is fairly close to yours, within say five years.

Most of the deferral increase is inheritable by a spouse after death. All of the part due to the basic state pension, varying amounts depending on specific years paying in on the rest.

greenglide

Note that your widow can inherit most of your Extra Pension but not of your top up.

The top up is inheritable.It is even inheritable by a surviving spouse who gets nSP while the deceased one was old rules.

kidmugsy

greenglide wrote: »

The top up is inheritable.It is even inheritable by a surviving spouse who gets nSP while the deceased one was old rules.

Thank you. Is it subject to the 50% heritability for Additional Pension? The deferral Extra Pension has a higher heritability than that - I reckon it's 90% for mine.

greenglide

I have always assumed that it is inheritable the same rules as deferring but I can't guarantee that.

It seems "sensible"!

kidmugsy

greenglide wrote: »

I have always assumed that it is inheritable the same rules as deferring but I can't guarantee that.

It seems "sensible"!

I've found this: "The rules on additional State Pension will apply to entitlements resulting from Class 3A contributions including inheritance – a surviving spouse or civil partner will be entitled to at least 50% of the additional State Pension."

So it would presumably be just the 50%. See also
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/265390/v2_mw__20131211_policy_brief_formatted_FINAL.pdf

It can't sensibly mimic deferral because deferral includes deferring your basic pension as well as your additional pension.

greenglide

But you can defer after paying the top up and get increments paid on the top up amount which are then inheritable as well!

Top up (and its increments) can be subject to sharing orders as well.

jamesd

Yes, it can be deferred and will increase by 10.4% for each year of deferral. At younger ages deferring is still the better option but there would be a point where combining deferring and buying directly would be better than deferring alone.

And buying beats annuity purchase, usually. Just not by as much as deferring usually does.