Deferred Pension - Confused

Theta101

I thought I understood this but now have doubts!

My Wife is currently deferring her SP at the 10.4% rate.
She has been doing this for about 3 months.
One option is for her to take the 'taxable' lump sum, if deferred for over 12 months.
We can not work out how the lump sum would be taxed!!
This wording is confusing us..."The lump sum is also taxable, but only at the top rate you were paying beforehand."
So if my wife is not paying tax "beforehand" would she pay tax on the lump sum at 0% or 20%.
There's no mention of the personal tax allowance, £11,000 per year.

Deferring for a number of years could mean a lump sum of over £20,000, with no other earned income, what would the tax be on that?

TIA

Froglet

From what I have read on this forum,she won't pay any tax on it,no matter how much the deferred amount is.So unless she has other income which takes her over the personal tax allowance she will be able to receive the money tax free.

bowlhead99

Simplistically, in the year that she takes the lump, if her income including the restarted state pension is £10k then she is in the 0% bracket and will pay 0% tax on the lump, even if the lump is £50k. If her income is £30k then she is in the 20% bracket and will pay 20% on the lump, even if the lump is £50k. If her income is £149k then she is in the 40% band and will pay 40% on all the lump, even if it is £50k.

The idea for that is that it would be a major disincentive to defer pension if it resulted in you getting a lump of money that would have usually have fallen into the 0 or 20 or 40% brackets, but several year's worth at once pushed you into the 20 or 40 or 45% brackets and destroyed the 'value' you had hoped to create.

Note that taking the one-off lump sum of what was deferred, does not get you the 10.4% per year returns. You just get back the income you had previously given up, plus a bit of interest. The advantage of the scheme is saying I gave up a year of pension and I *don't* want it back with some paltry amount of interest, instead I want to start getting a pension that's 10.4% higher for the rest of my life.

So for example, if your pension was £120 a week when you decided to stop taking it, after ten years of 'going without' the £6240 a year, they will be given a pension that's 104% higher, ie about £245 a week or £12730. An extra £6.5k a year forever.

So if you first give up the pension at age 65, then that year you are short £6.2k on what you would have had. The next year you are short £6.2k. The next year you are short £6.2k. And so on until age 75 when you ask for it again. That year you are up £6.5k over what you would have had. The next year you are also up £6.5k over what you would have had, and so on. By the time you are almost 85, all the extra 6.5s have covered all the short 6.2s. Then when you are 85, you get an extra 6.5k, which by now is over and above what you gave up. When you are 86, you get an extra 6.5k. When you are 87, you get an extra 6.5k. You are on the gravy train and this can continue for another couple of decades by which point you might have kicked the bucket; but basically by taking that time off, you have doubled your pension income forever. And obviously all these numbers are inflation-linked.

Whereas if you are 'greedy' and just take the lump sum after a year off, or ten years off, with a couple of percent interest on it, you don't get a bigger pension. Your sacrifice was purely to earn a low interest rate, not to make an investment. For some people who genuinely can't do without the money, that's OK - they can just think of it as a savings account that they built up and took the money out of all at once.

But if they do that, and ask for it all back as a lump sum, they just get it back in their hand, and it doesn't change the government's obligation to them. They are stuck on the 6.2k forever. The better option if you can afford it, is to take the 10.4% extra pension for life. It is better than any other safe investment you can make. It is so good that the government can't afford to offer it to new retirees any more. They've halved it, and cut back the spouse inheritability, for people retiring today.

greenglide

My Wife is currently deferring her SP at the 10.4% rate.
She has been doing this for about 3 months.

If she is getting the "old" 10.4% she must have been deferring since April 2016 at least unless she was in receipt of the pension and then "de-retired".

So her State Pension age is earlier than 6th April 2016? Otherwise she will not be able to get the lump sum and would get the reduced increments that came with nSP.

Theta101

Bowlhead, thanks for the detailed response.
We feel much better and not as confused now.

Merry Xmas

Theta101

greenglide, yes she was in receipt of the pension for about 2 years.

Then she deferred, based on information from this site.
She works part-time and her SP pushed her into paying income tax.
She is due to retire completely sometime in 2017.
I don't want her to stop deferring, ever!
But she likes the idea of the lump sum.
I see it as the best investment out there and "long life insurance"!

Merry Xmas.

Ganga

bowlhead99 wrote: »

Simplistically, in the year that she takes the lump, if her income including the restarted state pension is £10k then she is in the 0% bracket and will pay 0% tax on the lump, even if the lump is £50k. If her income is £30k then she is in the 20% bracket and will pay 20% on the lump, even if the lump is £50k. If her income is £149k then she is in the 40% band and will pay 40% on all the lump, even if it is £50k.

The idea for that is that it would be a major disincentive to defer pension if it resulted in you getting a lump of money that would have usually have fallen into the 0 or 20 or 40% brackets, but several year's worth at once pushed you into the 20 or 40 or 45% brackets and destroyed the 'value' you had hoped to create.

Note that taking the one-off lump sum of what was deferred, does not get you the 10.4% per year returns. You just get back the income you had previously given up, plus a bit of interest. The advantage of the scheme is saying I gave up a year of pension and I *don't* want it back with some paltry amount of interest, instead I want to start getting a pension that's 10.4% higher for the rest of my life.

So for example, if your pension was £120 a week when you decided to stop taking it, after ten years of 'going without' the £6240 a year, they will be given a pension that's 104% higher, ie about £245 a week or £12730. An extra £6.5k a year forever.

So if you first give up the pension at age 65, then that year you are short £6.2k on what you would have had. The next year you are short £6.2k. The next year you are short £6.2k. And so on until age 75 when you ask for it again. That year you are up £6.5k over what you would have had. The next year you are also up £6.5k over what you would have had, and so on. By the time you are almost 85, all the extra 6.5s have covered all the short 6.2s. Then when you are 85, you get an extra 6.5k, which by now is over and above what you gave up. When you are 86, you get an extra 6.5k. When you are 87, you get an extra 6.5k. You are on the gravy train and this can continue for another couple of decades by which point you might have kicked the bucket; but basically by taking that time off, you have doubled your pension income forever. And obviously all these numbers are inflation-linked.

Whereas if you are 'greedy' and just take the lump sum after a year off, or ten years off, with a couple of percent interest on it, you don't get a bigger pension. Your sacrifice was purely to earn a low interest rate, not to make an investment. For some people who genuinely can't do without the money, that's OK - they can just think of it as a savings account that they built up and took the money out of all at once.

But if they do that, and ask for it all back as a lump sum, they just get it back in their hand, and it doesn't change the government's obligation to them. They are stuck on the 6.2k forever. The better option if you can afford it, is to take the 10.4% extra pension for life. It is better than any other safe investment you can make. It is so good that the government can't afford to offer it to new retirees any more. They've halved it, and cut back the spouse inheritability, for people retiring today.

Bowlhead,what is the cut off point where the increased pension outweighs the total sum, I understand how it works but looking at your example how long do you have to live to make a profit.
The other side of the coin is if you defered £120 for 10 years you could take the lump sum of apprx £64000 tax free where as the higher pension might put you above the nil tax band.
What happens if the person pops their clogs?

bowlhead99

Ganga wrote: »

Bowlhead,what is the cut off point where the increased pension outweighs the total sum, I understand how it works but looking at your example how long do you have to live to make a profit.

As they are paying you an increase which is over 10% a year, you would need to live for a bit less than 10 years after you start taking it, to get your money back. In the example above, deferring from age 65 to 75 then drawing higher pension from 75 to 85, you would be in 'profit' overall.

It works with smaller amounts of deferral too: for example give up 2 years of £120 a week (about £12.5k total) and you get £145 a week, which is an extra £25 total. At £25 a week extra it will take about 500 weeks (a bit more than 9.5 years) to bring in £12.5k. So after 10 years you are well caught up, and move ahead.

Subject to the detailed rules, if you start taking the higher pension and then die, but you have a spouse, the spouse would inherit the 'extra' and keep getting it until they die. They will get that even if you have already been getting the high payouts for 10 or 20 years and moved well into 'profit' for yourself.

When you are ready to take it, you might as well take the lump sum if neither you or your spouse are not expected to keep on living another 10 years. Life expectancy varies widely. However, on average, a woman who has already got to age 65 without dying, will live to their very late 80s (24 more years) while a man age 65 will live a bit less (21 years, with a 1 in 4 chance of making age 94 and a 1 in 10 chance of making 99).

Those are of course a weighted average estimate which will include people age 65 who have terminal cancer and are going to die at age 65.5, and the people who are exceptionally healthy and are going to die at 110 or beyond. You can get cohort life expectancy tables at the ONS website, but the simple ready-reckoner for how long will I live if I am what age now, on the government website is http://visual.ons.gov.uk/how-long-will-my-pension-need-to-last/


If you live less long than 10 years after restarting it, you will need less total money to live on over the course of your lifetime, because you will have fewer years of living expenses, so having given up some income is fine. However if you live longer, you and your descendents would probably rather you kept bringing home nearly 13k a year rather than just over 6k.

The other side of the coin is if you defered £120 for 10 years you could take the lump sum of apprx £64000 tax free where as the higher pension might put you above the nil tax band.

Sure, and if you claimed the income as normal as you were going along and stored it in a bank account, you could take a lump of it out without paying tax as well. But neither of those options have the opportunity to deliver a guaranteed large increase to your ongoing income for the rest of your days. Yes, people with large incomes have to pay tax. I would rather have a large income and pay a bit of tax than be excluded from having to pay tax because I didn't even bring in as much as the personal allowance.

What happens if the person pops their clogs?

Under the rules mentioned above [i.e. the 10.4% scheme for people whose state pension age was earlier than this April, not the current one], if they were already getting additional pension from deferring then this ongoing extra money (i.e. the extra weekly £25 after two years or the extra weekly £125 after ten years, in the examples above) would pass to their spouse, or die with them if they didn't have a spouse. By contrast under the scheme for people who reached state pension age in April this year or haven't got there yet, the spouse won't inherit.

If the person was still deferring and hadn't got round to telling DWP that they wanted to restart, or had told them they wanted to restart but hadn't made the choice of lumpsum or ongoing, those extra pension rights become part of the estate. The executor can decide to claim the cash and distribute it, or claim the ongoing £25pw or £125pw or whatever for life, to go to the spouse. In that situation, as the additional pension can only go to the spouse, the executor of the estate couldn't say I want this £125pw for life to go to the kids, but they can say I want the (e.g.) £60k lumpsum to go to the estate so it can go to the kids.

Ganga

bowlhead99 wrote: »

As they are paying you an increase which is over 10% a year, you would need to live for a bit less than 10 years after you start taking it, to get your money back. In the example above, deferring from age 65 to 75 then drawing higher pension from 75 to 85, you would be in 'profit' overall.

It works with smaller amounts of deferral too: for example give up 2 years of £120 a week (about £12.5k total) and you get £145 a week, which is an extra £25 total. At £25 a week extra it will take about 500 weeks (a bit more than 9.5 years) to bring in £12.5k. So after 10 years you are well caught up, and move ahead.

Subject to the detailed rules, if you start taking the higher pension and then die, but you have a spouse, the spouse would inherit the 'extra' and keep getting it until they die. They will get that even if you have already been getting the high payouts for 10 or 20 years and moved well into 'profit' for yourself.

When you are ready to take it, you might as well take the lump sum if neither you or your spouse are not expected to keep on living another 10 years. Life expectancy varies widely. However, on average, a woman who has already got to age 65 without dying, will live to their very late 80s (24 more years) while a man age 65 will live a bit less (21 years, with a 1 in 4 chance of making age 94 and a 1 in 10 chance of making 99).

Those are of course a weighted average estimate which will include people age 65 who have terminal cancer and are going to die at age 65.5, and the people who are exceptionally healthy and are going to die at 110 or beyond. You can get cohort life expectancy tables at the ONS website, but the simple ready-reckoner for how long will I live if I am what age now, on the government website is http://visual.ons.gov.uk/how-long-will-my-pension-need-to-last/


If you live less long than 10 years after restarting it, you will need less total money to live on over the course of your lifetime, because you will have fewer years of living expenses, so having given up some income is fine. However if you live longer, you and your descendents would probably rather you kept bringing home nearly 13k a year rather than just over 6k.

Sure, and if you claimed the income as normal as you were going along and stored it in a bank account, you could take a lump of it out without paying tax as well. But neither of those options have the opportunity to deliver a guaranteed large increase to your ongoing income for the rest of your days. Yes, people with large incomes have to pay tax. I would rather have a large income and pay a bit of tax than be excluded from having to pay tax because I didn't even bring in as much as the personal allowance.

Under the rules mentioned above [i.e. the 10.4% scheme for people whose state pension age was earlier than this April, not the current one], if they were already getting additional pension from deferring then this ongoing extra money (i.e. the extra weekly £25 after two years or the extra weekly £125 after ten years, in the examples above) would pass to their spouse, or die with them if they didn't have a spouse. By contrast under the scheme for people who reached state pension age in April this year or haven't got there yet, the spouse won't inherit.

If the person was still deferring and hadn't got round to telling DWP that they wanted to restart, or had told them they wanted to restart but hadn't made the choice of lumpsum or ongoing, those extra pension rights become part of the estate. The executor can decide to claim the cash and distribute it, or claim the ongoing £25pw or £125pw or whatever for life, to go to the spouse. In that situation, as the additional pension can only go to the spouse, the executor of the estate couldn't say I want this £125pw for life to go to the kids, but they can say I want the (e.g.) £60k lumpsum to go to the estate so it can go to the kids.

Thanks for the speedy reply bowlhead99, I turned 65 in July2015 and have not drawn my state pension,i actually worked on for 8 months for the pay rise (no NI to pay ) but have been retired for 9 months an am living on my wifes money:rotfl:
As for how long i will live,anybody got a crystel ball:rotfl:

bowlhead99

Statistically it is likely to be a better investment for you to live on your wife's money now and draw the state pension later, than for you to draw a state pension and try to invest that to turn it into something bigger. Because there aren't any good savings accounts or safe investments which can produce anything like as much return.

As I explained to my mum a while back, it's like the government are saying, "you can wait and have a pension of £230pw in ten years time for the rest of your life, or you can be greedy and say you want it right now, which is fine with us but it's only going to be £115pw."

As her own mum is 100+ not out, that's a heck of a long time to be preferring the £115pw. I suggested if she is not even going to spend the £115pw yet because she already has savings, investments, other pensions, a spouse's income, it would be bonkers to take the £115 now. Or if 'bonkers' sounds a bit harsh, then perhaps 'shortsighted'.

Of course everybody's circumstances are different and not everybody can afford to defer, and some people won't have a long life expectancy due to a range of different potential factors. As for yours, I can only speculate. Relatively few 66-year-old guys will drop dead in the next week. Relatively few of them will last 40 years. Most will fall in between. The office for national statistics website I linked above says that someone of your gender and age will on average live to 87, and there's a 10% chance you will still be ticking along at age 99.

10% doesn't sound a lot, but if there was a 10% chance I would die when crossing the road at a busy junction, I would definitely find somewhere else to cross, because 10% is pretty damn high. So, if I was age 66 and wondering about my financial future, I wouldn't take the risk of assuming I'd die age 87 and accept being in relative poverty after that if I was 'unlucky' enough to live to 99 or beyond.

If your financial future is very rosy anyway, it doesn't really matter, you could take the weekly pension now and keep giving it to your kids, or defer and give them a larger amount later by which time they might be too old to fully enjoy it as they could today.

Ganga

bowlhead99 wrote: »

Statistically it is likely to be a better investment for you to live on your wife's money now and draw the state pension later, than for you to draw a state pension and try to invest that to turn it into something bigger. Because there aren't any good savings accounts or safe investments which can produce anything like as much return.

As I explained to my mum a while back, it's like the government are saying, "you can wait and have a pension of £230pw in ten years time for the rest of your life, or you can be greedy and say you want it right now, which is fine with us but it's only going to be £115pw."

As her own mum is 100+ not out, that's a heck of a long time to be preferring the £115pw. I suggested if she is not even going to spend the £115pw yet because she already has savings, investments, other pensions, a spouse's income, it would be bonkers to take the £115 now. Or if 'bonkers' sounds a bit harsh, then perhaps 'shortsighted'.

Of course everybody's circumstances are different and not everybody can afford to defer, and some people won't have a long life expectancy due to a range of different potential factors. As for yours, I can only speculate. Relatively few 66-year-old guys will drop dead in the next week. Relatively few of them will last 40 years. Most will fall in between. The office for national statistics website I linked above says that someone of your gender and age will on average live to 87, and there's a 10% chance you will still be ticking along at age 99.

10% doesn't sound a lot, but if there was a 10% chance I would die when crossing the road at a busy junction, I would definitely find somewhere else to cross, because 10% is pretty damn high. So, if I was age 66 and wondering about my financial future, I wouldn't take the risk of assuming I'd die age 87 and accept being in relative poverty after that if I was 'unlucky' enough to live to 99 or beyond.

If your financial future is very rosy anyway, it doesn't really matter, you could take the weekly pension now and keep giving it to your kids, or defer and give them a larger amount later by which time they might be too old to fully enjoy it as they could today.

I am more worried that i will be too old to enjoy it,we enjoy holidays in the sun. we know that we have to be financialy prudent but it would break my heart to work for over 50 years and plan for to-morrow and find that to-morrow never comes,as i said with the aid of a crytal ball the future would be rosy.
thanks again and a Very Merry Christmas to everyone :A