Deferred pension: lump sum or weekly income

OTK

I deferred my State Pension I already receive an index linked pension of approximately £8,500. The situation with the State Pension is that I can choose between either:

1) An additional £20.65 per week added to my State pension. With my normal State Pension of £132.34 this will give me a total weekly pension of £152.99. Oror
2) A one off lump-sum payment of £10,161.24 (subject to 20% rate of income tax). I have approximately £100,000 in savings; no debts

What factors ought I to consider before making my decision. What advice would you give in this situation? Thank you in advance for your help.

Linton

£20 per week is about £1K per year. So looking at things crudely the lump sum covers 10 years of pension. Plus the £1K per year is index linked. With average health you can expect to live to 85. So unless you need the cash, which it seems you dont or have a good reason to believe you will die early the extra pension is by far the better deal.

xylophone

See below.

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

See also

http://www.taxvol.org.uk/about-tax/entitled-10-band-savings-interest/

You already have savings and an index linked DB pension.

Assuming that you are in the mid sixties and might reasonably hope to reach your mid eighties, the higher state pension (which is currently index linked via "triple lock") seems the better option?

SEE BELOW RE HOW INDEXING IS APPLIED TO BSP/ASP.

http://www.thisismoney.co.uk/money/pensions/article-3459907/STEVE-WEBB-additional-deferred-state-pension-increases-triple-locked.html

bigadaj

If you managed to earn less than the personal allowance in the tax year you took the lump sum then I believe that you wouldn't be subject to basic rate tax.

In general though taking the extra income would probably be the best deal for you.

greenglide

(which is currently index linked via "triple lock")

The triple lock only applies to the basic pension. The increments paid for deferral only get the CPI increase.

But usually still a no-brainer to take the pension rather than the lump sum.

xylophone

The triple lock only applies to the basic pension. The increments paid for deferral only get the CPI increase.

Explained in article to which I linked - did you read it?

jamesd

The higher income is the best option for those in normal good health, with borrowing paid off with the higher income likely to be the better deal if there is a need for a lump sum.

Factors to consider include:

1. whether there is any immediate need for the money which couldn't be better met by short term borrowing or savings
2. life expectancy, for those in normal good health it's high 80s
3. tax rates, sometimes the income tax rate that would apply is 40% and this increases the break even time but probably not enough to change the decision

Assuming I was in normal good health I'd take the higher income as a form of longevity insurance. With the same assumption I'd also be likely to defer for five to ten years for the same longevity insurance reason. during that time I'd spend savings and investments to replace the state pension I'm not taking.

greenglide

Explained in article to which I linked - did you read it?

Yes I did.

Stating it is uprated by the triple lock and providing a link to an article that says "oh no it isnt" is by no means clear though.

jamesd

xylophone wrote: »

Explained in article to which I linked - did you read it?

He did. I did. We know that OTK started deferring prior 6 April 2016 from the increase of £20.65 on a state pension of £132.34. That is an increase of 15.6% which means that state pension age was reached about 17 months ago and OTK is under the old system, not the flat rate system.

The answer says for those who reached state pension age before the flat rate system started on 6 April 2016:

"the additional pension (or ‘SERPS’ pension) is indexed only in line with CPI inflation and the same is also true of your increments for deferral."

There is additional information for those who reach their SPA under the flat rate system which says that the current pencilled in but subject to change plan would be for the first £155.65 to be increased with the triple lock, including any deferral within that range. If OTK was in the flat rate system OTK could end up getting triple lock increases but since we know OTK isn't in it that doesn't matter for this answer.

Thanks for the pointer to the article, though, I didn't know about that aspect of the plan for those reaching SPA under the flat rate system. That adds a potential nice bonus for deferring.

xylophone

The OP has deferred under "old state pension" rules.

The person in the article has deferred under "old state pension rules".


The article is therefore relevant to his circumstances and explains how "triple lock" is applied to his pension.

It seemed to me quite obvious that the article should be consulted.

However, for the avoidance of doubt, I have added a pointer to my original post.

greenglide

There is additional information for those who reach their SPA under the flat rate system which says that the current pencilled in but subject to change plan would be for the first £155.65 to be increased with the triple lock, including any deferral within that range.

I am not convinced that this statement is actually true though.

Most of the underlying components that make up nSP that you never see get added together and go into the nSP amount (subject to a cap of £155.65) or Protected Payment amounts. But the increments for deferral are separate (they are Extra State Pension to distinguish them from Additional State Pension of old) and appear as a separate line on the entitlement notification. The assumption has always been that this would be uprated by the CPI. It is possible that DWP will perform a clerical calculation if the nSP amount is less than the maximum and top up the nSP amount until the maximum is reached but this would be fraught with problems.

The will not have the option of uprating the ESP partly by the triple lock and partly by CPI - it doesnt work that way!

Since you need to defer for 10 weeks to get anything the first awards with deferral for nSP could only be from the last week or so.