To defer, or not to defer?

xylophone

The OP should read the Age Concern leaflet re pension credit.

jamesd

Zudecke wrote: »

She lives in social housing and unfortunately doesn't own any property . So if she defers after 3 years, she would receive ~£8k p/a? Would she be eligible for housing benefit as well given that that amount wouldn't even cover her rent?

She currently doesn't receive any benefits (aside from social housing, which I assume is some sort of benefit?).

OK, based on that it will probably not make sense for her to defer any longer. This is because any increase to her state pension regular income is likely to reduce her entitlement to Pension Credit, Housing Benefit and other means tested benefits.

The main exception to that is if she plans to work so long that her increased state pension will take her well over benefit level. That will be tough since it'll have to be over around £151.20 a week this year for Pension Credit and also enough to cover her housing costs and council tax. She probably can't get that high with any sensible amount of deferring. As a rough check, though, what's her approximate rent and council tax level? Then we can do a rough calculation of how long she'd have to defer to even break even on income.

If rent is say £100 a week and council tax £20 a week with assumed £151.20 for Pension Credit it would take an annual income of at least £14,102.40 to break even with just those benefits. With a state pension entitlement before deferring of £139.61 a week, £7,259.72 a year, she'd need to defer for nine years to break even.

She can gain 60% of extra income because she'd qualify for Savings Credit on her Pension but the council tax benefit and others might not allow for this, I don't know the rules well enough to be sure.

To make a good decision she needs to get a benefits check up at a place like Citizens' Advice for now and after she stops working.

There is one value to deferring, to accumulate enough savings to get up to the savings cap for the most strict benefit, taking the lump sum from deferring instead of the increased income. That'll probably be Housing Benefit but the level that starts to reduce benefits depends on the council, it's no longer nationally standardised. She's probably already deferred too long for this purpose, the limit is likely to be a few thousand Pounds.

Since she's reached state pension age further working won't lead to any increase in her state pension for the extra years of work. Just those potential increases for deferring.

She may also be entitled to some benefits now. Depends on her income, which will be increased by the value of her state pension for benefits calculations even though she's not taking it.

Zudecke_2

As a rough check, though, what's her approximate rent and council tax level? Then we can do a rough calculation of how long she'd have to defer to even break even on income.

Her rent is £146.21 pw + £349.16 or so in council tax per year (believe this excludes the Greater London Authority tax).

She may also be entitled to some benefits now. Depends on her income, which will be increased by the value of her state pension for benefits calculations even though she's not taking it.

Really? Wow, I hadn't realised this!

So to summarise:
- might not make sense to defer any longer, but double check with Citizens Advice Bureau.
- if she works + pension, she'll exceed the personal tax free allowance for the years she does this. Unless she can negotiate less hours/part time with her boss.

So no clean consensus as yet?

jamesd

Almost certainly no point in her deferring any longer, need to know her council's council tax credit limit to know for sure but it's unlikely to be over £10k and I've seen mention of numbers as low as 3k.

Other than that possibility, no point in deferring any longer. She's just going to lose all of it in reduced benefits if she takes it as income. If she takes it as capital above the savings limit she'd just lose benefits until below the savings limit again.

Her annual income from benefits would be around £15,814 from the Pension Credit, Housing Benefit and Council Tax Benefit. And more on top of that. To even get to that level of income she'd need to defer for 11.3 years. That is, 11.3 years in total before she even starts to get any higher income than she'd get from just those three benefits.

Zudecke_2

jamesd wrote: »

Other than that possibility, no point in deferring any longer. She's just going to lose all of it in reduced benefits if she takes it as income. If she takes it as capital above the savings limit she'd just lose benefits until below the savings limit again.

Can you please explain the different between the bold

Many thanks everyone for your kind and informative input. Starting to male sense of this now.

kidmugsy

Your ma can take her reward for deferring either as income (Extra Pension) or as capital (Lump Sum). The former is simply income; the latter is taxed at whatever her income tax rate is on her other income in the relevant tax year i.e. at 0%, 20%, or whatever.

as jamesd said, if she takes it as capital and that happens to give her total capital above the savings limit, she'd lose benefits until her capital has run down below the savings limit again. Some people avoid this problem by spending the excess capital on some obviously legitimate purpose e.g. changing an old car, buying modest new furniture, going on a not absurdly extravagant holiday, or whatever. I imagine that there's advice to be had on the relevant forum at MSE.

jamesd

Zudecke wrote: »

Starting to male sense of this now.

Kidmugsy explained. Don't worry about it taking a while to understand, it's fiddly until you get used to it and the benefits stuff is even worse than pensions can be at times.

In her case taking it as capital is likely to be best.

If she does that after stopping work she will then lose some of that to the means test. Quite possibly half of it or more, say if the Council has a Housing Benefit savings limit of £3,000. But the alternative of higher income means losing all of it because her benefits will just be reduced by the higher income amount. Keeping something beats keeping nothing.

If she takes it before stopping work, it's all her money and she can use it on anything reasonable without it being a problem. Knowing that she will stop working soon does impose some limits because there are rules about "deprivation of assets" - blowing money - for those who are about to claim benefits of some sorts. But things like home improvements, better car, holidays and such while working that are not out of keeping with the sort of things she might normally do should be fine.

Zudecke_2

kidmugsy wrote: »

Your ma can take her reward for deferring either as income (Extra Pension) or as capital (Lump Sum). The former is simply income; the latter is taxed at whatever her income tax rate is on her other income in the relevant tax year i.e. at 0%, 20%, or whatever.

as jamesd said, if she takes it as capital and that happens to give her total capital above the savings limit, she'd lose benefits until her capital has run down below the savings limit again. Some people avoid this problem by spending the excess capital on some obviously legitimate purpose e.g. changing an old car, buying modest new furniture, going on a not absurdly extravagant holiday, or whatever. I imagine that there's advice to be had on the relevant forum at MSE.

jamesd wrote: »

Kidmugsy explained. Don't worry about it taking a while to understand, it's fiddly until you get used to it and the benefits stuff is even worse than pensions can be at times.

In her case taking it as capital is likely to be best.

If she does that after stopping work she will then lose some of that to the means test. Quite possibly half of it or more, say if the Council has a Housing Benefit savings limit of £3,000. But the alternative of higher income means losing all of it because her benefits will just be reduced by the higher income amount. Keeping something beats keeping nothing.

If she takes it before stopping work, it's all her money and she can use it on anything reasonable without it being a problem. Knowing that she will stop working soon does impose some limits because there are rules about "deprivation of assets" - blowing money - for those who are about to claim benefits of some sorts. But things like home improvements, better car, holidays and such while working that are not out of keeping with the sort of things she might normally do should be fine.

I'm bold @kidmugsy - the advice (thank you again!) seems contrary to what we've read in the "deferring your state pension" pamphlet (DWP024) (see photo of the blurb here: . Can we clear this up?

In any case, despite that confusion above (at least in our eyes), you're both suggesting taking the "LUMP SUM" (as opposed to the "EXTRA WEEKLY STATE PENSION" NOW, whilst she's still in work, with some reasonable spending to ensure that her savings (capital) is below the threshold to ensure she is entitled to means tested benefits (eg. Pension Credit, Housing Benefit and Council Tax Benefit) - by the time she elects to give up working. Am I right??

Thank you both (and all!)

kidmugsy

Aha! Well found. So the Lump Sum won't affect her Pension Credit or Housing Benefit after all, but the Extra Pension would. That must naturally incline her to favour taking the Lump Sum after she stops work so that she can avoid paying income tax on it. Well I never!

So back we go to the point where all this started. As you implied originally she would be best off taking the Lump Sum such that she pays no tax on it. Happily it doesn't consume part of her Personal Allowance. It gets taxed at the same rate as her other income in that tax year: as the booklet explains, it won't shove her up into another tax bracket. So as long as her annual income in the year she took the Lump Sum is less than £11k (or whatever the Personal Allowance will be in future) she'll be untaxed on the Lump Sum.

There is another wrinkle that I've heard about but haven't checked myself in the booklet; you might like to look for it. Apparently you can decide to start drawing your State Pension in one tax year and ask for your Lump Sum to be paid in the next tax year. That might give her a bit of welcome extra freedom over deciding exactly when to stop work.

jamesd

Well found!

That bit of information means that she can still benefit from deferring her state pension provided she takes the lump sum option. Choosing to take the lump sum after working means that her tax rate would be zero so she'd get the lump sum free of income tax.