Deferred state pension

bouicca21

I have deferred my state pension for nearly 6 years (old rules). I am now going to retire in the next few months. My state pension plus occupational pension is pretty much enough to live on (I've been practising) though wouldn't pay for the kind of travel I want to indulge in. I'll also have a lump sum to add to my existing savings. I'll drop down to standard rate tax. It's likely I'll work part time so I might be able to defer for another year.

So I'm doing some calculations. I have had two serious illnesses in the past 6 years so my confidence in surviving the 10-11 years to break even on extra pension isn't great. The extra pension would make me very comfortable. A lump sum from state pension however would enable me to start passing some capital to my children straight away to help get them a deposit to buy. I could pass 6k straightaway and since I'm not actually divorced I think I can give my ex 6k for him to pass on too.

My flat is roughly worth the IHT threshold so any capital at my death will be subject to IHT.

I have the projection that was supplied to me when I became entitled to state pension. As I understand it the 10.4% is simple; the 2.5 is compounded.

I can't find the answers to two basic questions that affect my calculations. 1. Does the interest calculation work only on the state pension value at the date I became entitled or does it take into account the annual uplift? 2. And is the interest also payable on the second state pension?

Mojisola

bouicca21 wrote: »

I could pass 6k straightaway and since I'm not actually divorced I think I can give my ex 6k for him to pass on too.

Not to do with the pension but - have you got a will leaving your estate to your children (or elsewhere). Without a will, your spouse would be first in line to inherit if you die intestate.

atush

I think it takes into acct annual uplift?

Tax is due on the income when you tak it, not the interest/uplift before you do

Are you a HR taxpayer now? If so, open a PP and whack in as much as you can for the 40% relief. Will add to your savings and current LS so you can take the larger SP.

And if you have split and not divorced, you really need a will and to fill out expressions of wishes forms?

bouicca21

Yes I have a will. Now contemplating an enduring power of attorney for finances and medical. Just in case ...

Probably not worth a PP within months of retirement. Didn't do one before as it would add to the pot the ex could claim; probably should have done it as soon as we signed the financial agreement but that was only last year.

kidmugsy

bouicca21 wrote: »

So I'm doing some calculations. I have had two serious illnesses in the past 6 years so my confidence in surviving the 10-11 years to break even on extra pension isn't great. The extra pension would make me very comfortable. A lump sum from state pension however would enable me to start passing some capital to my children straight away to help get them a deposit to buy. I could pass 6k straightaway and since I'm not actually divorced I think I can give my ex 6k for him to pass on too.

My flat is roughly worth the IHT threshold so any capital at my death will be subject to IHT.

So taking the lump sum and then dying could cost you up to 40% of the lump sum. Do you think you have a good chance of surviving for, say, 60% of the break-even period?

Note too that in addition to the £3k p.a. you can gift exempt from IHT, you can also make regular gifts out of surplus income. Would your extra pension mean that you had useful amounts of surplus income to gift to your children?

bouicca21 wrote: »

I have the projection that was supplied to me when I became entitled to state pension. As I understand it the 10.4% is simple; the 2.5 is compounded.

I can't find the answers to two basic questions that affect my calculations. 1. Does the interest calculation work only on the state pension value at the date I became entitled or does it take into account the annual uplift? 2. And is the interest also payable on the second state pension?

Yes, the uplift is incorporated. And yes too to SERPS/S2P.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

kidmugsy

Here's another thought. One way to make taking the lump sum better value is to arrange to pay no income tax on it. You could conceivably do it as follows.

Is it possible to defer your occupational pension so that your income in either 15-16 or 16-17 will be below the Personal Allowance (currently £10,600 p.a.)? if so, start the State Pension with good timing so that even with that added on you are still not an income tax payer in one or other of those tax years. In that case you can get the lump sum with no income tax due.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

How are you to survive on an income of less than £10,600 p.a.? Borrow if needs be, perhaps both by taking a cheap personal loan (they are cheap at the moment) and by getting a 0% credit card (which you'd want to do while you are still employed). Then eventually pay them back with the lump sum you'll get from your occupational pension.

Avoiding that income tax bill on the lump sum makes it 25% bigger.

jamesd

The 10.4% is simple but it's based on the value after all of the annual inflation-related/triple lock increases in the pension. It applies to both basic and additional state pension, each uprated with inflation using its own rules - additional is CPI not triple lock these days. So you don't lose out to inflation over the years, you genuinely do get 10.4% on top.

Instead of proceeding as planned, why not check the price of term life insurance? It can be very cheap and you may find that you can easily buy more life insurance value from the extra income than the lump sum value. So it may be a great deal to get the higher income and use some to pay for insurance, so you get the best of both worlds: higher income and lump sum for family if you die more quickly than desired. Life insurance payments are made outside your estate.

Regular gifts out of the higher income have the advantage of avoiding inheritance tax.

There's another inheritance trick that you can use: equity release. If you were to do this with say one of the plans that allows regular drawings you could set up a regular monthly payment as extra income. You can do things like spending or giving away that income. Meanwhile every Pound you take out is reducing the potential inheritance tax level of your estate. You can also consider buying life insurance or assurance from the higher income to shift that payout out of your estate if it happens during the period of cover.

Life insurance: fixed term, pay during the term, cover ends at end of term.
Life assurance: cover bought for the rest of your life. Pay and have cover until you die or choose to stop paying.

kidmugsy

If you are tempted by the Whole of Life policies that jamesd suggests, do make sure that you buy one where your subscription is fixed.

PlutoinCapricorn

I have seen a case where someone paid no tax on the lump sum: the pension was deferred until towards the end of a year in which there was no tax liability.

atush

bouicca21 wrote: »

Yes I have a will. Now contemplating an enduring power of attorney for finances and medical. Just in case ...

Probably not worth a PP within months of retirement. Didn't do one before as it would add to the pot the ex could claim; probably should have done it as soon as we signed the financial agreement but that was only last year.

Still worth doing if you pay HR (even lower rate really) as you can put in up to 100% of yoru income or 40K whichever is lower, plus use past 3 years unused allowance. Can do it during this entire tax year.

kidmugsy

jamesd wrote: »

Regular gifts out of the higher income have the advantage of avoiding inheritance tax.

There's another inheritance trick that you can use: equity release. If you were to do this with say one of the plans that allows regular drawings you could set up a regular monthly payment as extra income. You can do things like spending or giving away that income.

I doubt that a gift out of drawings from equity release would qualify as IHT-exempt by virtue of being from income, because it wouldn't be from income. On the other hand if this trick reduces the estate into the IHT nil rate band, the gift would be exempt from IHT anyway.

I suppose the Budget on July 8th might have something to say about IHT on houses. The Conservatives' declared policy is to add a house-related £175k to the IHT threshold. (A rotten idea, in my view, but potentially useful for you.)