State pension general questions & Advice

spoog

Hi folks,

This last few days I have been looking over my mums state pension and helping her sort it out - we are in the process of making the claim.

My mum reached pension age 4 years ago in March 2012. But she has deferred (not claimed it so far), until now that she has decided to do so. But we have a few questions and such that someone maybe able to answer while we wait!

She signed up to check the Govs 'state pension statement' website, to see how many qualifying years she has as she wasn't really sure - and she has 33. So I believe this means she is entitled to full amount per week. (currently £119 i think).

Anyhow, our questions:

1/She has decided that when the claim is done, she will take the money as a lump sum and continue receiving regular payments.

Is the lump sum made up of how much it was per week during the last 4 years? or is it based on the current rate?

2/If she goes ahead with this decision to take the lump sum - would it be taxed at all? I have tried to look around online and am not sure of the answer to this. Mum doesnt work or receive any other money from anywhere, so my understanding is this wouldn't be taxed, but am I wrong in that thought?

3/Ive tried calculating what I believe she would/should receive once all done, as she would like some idea as to what she will gain. But my maths isnt the best! So with 33 qualifying years at (assuming) rate of £119 pw, and deferring for 4 years - including the possibility of tax on that - what potentially could she receive?

Thanks for reading anyhow and any thoughts are welcome. I understand she/we could just wait and see what happens, but I thought I would look ahead and try to give her some idea as to what the deal will be!

Cheers!

LXdaddy

See https://www.gov.uk/deferring-state-pension
As your mum has deferred for 4 years she will be treated under the pre April 2016 rules (which are more generous )

Lump sum payment

You can choose to get a one-off lump sum payment if you put off claiming your State Pension for at least 12 months in a row. This will include interest of 2% above the Bank of England base rate.


Your extra State Pension counts as income - you may have to pay tax on it.

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

on page 11 that says

you will get a one-off payment based on the amount of State Pension you would have got if you had been claiming it, as well as interest on this amount. (The interest will always be at least 2% above the Bank of England ‘base rate’.) You will also get your State Pension at the normal rate when you claim it.

xylophone

See below.

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

She may have been entitled to more than the basic state pension - it is possible that she had some SERPS/S2P.

spoog

Thanks for the replies so far! Some useful information there. Has made things a little clearer, although it appears with the interest over the last 4 years, which fluctuates - actually calculating roughly what mum will get can't be done too precisely!

Thanks again

spoog

One thing I meant to add!

Looking at the 'tax on your lump sum'..

That booklet pdf states that if you pay no tax because other income or the state pension is less than the personal allowance, you wont pay tax on the lump sum.

So, in mums case - she doesn't pay tax as she doesnt earn anything anywhere, and once she gets her state pension through what she gets weekly/yearly will still be less than your personal allowance, so does this mean her lump sum wont be taxed? Am i reading that correctly?

xylophone

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

LXdaddy

spoog wrote: »

One thing I meant to add!

Looking at the 'tax on your lump sum'..

That booklet pdf states that if you pay no tax because other income or the state pension is less than the personal allowance, you wont pay tax on the lump sum.

So, in mums case - she doesn't pay tax as she doesnt earn anything anywhere, and once she gets her state pension through what she gets weekly/yearly will still be less than your personal allowance, so does this mean her lump sum wont be taxed? Am i reading that correctly?

Yes. You pay the same rate of tx on the lump sum as you do on the highest £ of income that you have ignoring the lump sum.


I think this is sometimes described as your marginal rate of tax.




In relation to your calculation of how big the lump sum will be - the base rate has been 0.5% for a looooong time now so if you used 2.5% rate of interest you'd be pretty close. I'm sure that the gov.uk site will have the basic pension numbers available for the last few years.


It's not clear to me how they apply the interest - would it be simply like every 4 weeks they would have made a payment and they calculate 2.5%/year (compounded?) on that payment from then until when the lump sum is paid.

spoog

Thanks again for the replies!

I worked out (very approximately!), something on the lines of.. if the lump sum is calculated by the weekly rate of pension each year that it was deferred, i checked online what those amounts were each year. I then added 2.5% per year interest (although that changes over time - well.. supposed to altho its stuck at 0.5% as you say for a long time now!), added it all together and that gave me my very rough, end result/amount.

Im not totally sure how the interest is calculated, but in the pdf above on page 16, there is an example of how the interest is worked out i think.

There is also a big table in there, that does actually show you, based on how much you get per week, how many years you have deferred, how much lump sum that would have been and how much it will be once you claim it. I would imagine though that its approximate and only once a claim has gone through that we will get a proper figure.

Thanks again!

Ganga

If your mother has not claimed her state pension for 4 years and 2 months and she was to receive approx. £119.00 per week she would be entitled to £119.0 x 216 weeks - £25704.00 x 2.5% -£642.60 total £26346.60 approx. some of the more learned pollsters will be able to give you a more exact figure

greenglide

It is generally believed that taking the lump sum rather than getting pension for the rest of you life is a "bad idea".

Does she has a reason for taking the lump sum? Planning a trip, buying a house or will it just be put in the bank as "savings"?

Will there be other sources of income? Is she married? If so the increments for deferral are inheritable. It is a wonderful deal.

It does need careful investigation taking into account a true assessment of expected lifetime.

Alter_ego

If you opt for the increased pension (10.4% pa) the break even point is around 10 yrs.