Taking Deferred OAP as a lump sum 6 March at 4:53PM in Pensions, annuities & retirement planning 22 replies 672 views

springali

I am now 73 years old and have deferred my OAP since I was 65 meaning that I now have the option of taking c £70k lump sum or increasing my weekly pension entitlement.
I am a basic rate tax payer and want to be sure that if I decide to take the lump sum it will not mean that I am pushed into a higher rate tax band in the year that I take the lump sum. My current annual income from two small private pensions is around £18k pa.
My understanding is that I would be taxed at 20% on the lump sum and that the tax will be deducted before payment to me and that I do not then have to declare on my next SA return? Is that correct?

pinnks

I assume you have read this? Delay (defer) your State Pension: What you'll get - GOV.UK (www.gov.uk)

The £70k will be added to any other taxable income you receive in that year meaning you will be taxable at 40% on anything over £50,270.  Your Personal Savings Allowance will also reduce to £500, from £1,000.  If you are already in the 40% band, you could see other tax consequences too.

Linton

As you are 73 it would seem that you reached SP age prior to April 2016.  Under those circumnstances you are subject to the pre-2016 rules.  Those rules say that the deferment lump sum is taxed at the same rate as the rest of your income.  It does not put you nto a higher tax band. See https://www.gov.uk/deferring-state-pension/what-you-get

I dont know how the tax will be deducted.  I guess but dont know that you may be presented with a tax bill after the end of the tax year.  HMRC wont know for certain what your tax band for the whole year will be until then.

pinnks

Hmm, is that what it means?  That para can be read both ways.

I have done a bit more googling and stand corrected.  It is generally at your prevailing marginal rate.  This page is (in my view) worded more clearly than the HMRC page, ho hum... What tax do I pay on my state pension lump sum? | Low Incomes Tax Reform Group (litrg.org.uk)

molerat

You’ll be taxed at your current rate on your lump sum payment. For example, if you’re a basic rate taxpayer your lump sum will be taxed at 20%.

I thought that bit was fairly clear

springali

Thanks Linton,
The Pension Service tell me that when I elect to take the lump sum I will be asked to tick a box to say that I am a basic rate taxpayer. They will then deduct tax at 20% from the lump sum. I was just concerned that I could get another tax bill when my SA Return is submitted. It seems not and that I can make my judgement on the fact that my total tax bill for the lump that I take will be c £14k.

Dazed_and_C0nfused

springali said:

I am now 73 years old and have deferred my OAP since I was 65 meaning that I now have the option of taking c £70k lump sum or increasing my weekly pension entitlement.
I am a basic rate tax payer and want to be sure that if I decide to take the lump sum it will not mean that I am pushed into a higher rate tax band in the year that I take the lump sum. My current annual income from two small private pensions is around £18k pa.
My understanding is that I would be taxed at 20% on the lump sum and that the tax will be deducted before payment to me and that I do not then have to declare on my next SA return? Is that correct?

No, that bit is wrong.

It is still taxable income and must be declared on a Self Assessment return if you complete one.  You would also declare any tax deducted by DWP, which based on what you've posted would be 20%.

You have to tell DWP your tax rate as part of the process for applying for the deferred lump sum.

xylophone

See



https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim75750

springali

Hi Pinnks,
Thanks. That highlights my dilemma. I am getting conflicting advice. The. Pension Service tell me that due to the quirks of the pension rules I would be taxed at my current tax rate (20%)despite the Lump sum taking my annual income for the year I draw it into higher tax bands. An accountant friend confirms this and Linton takes that view.That was news to my IFA and your view is also different. I just don't want to make a choice and end up with an unexpected tax bill.

xylophone

I am getting conflicting advice

Read link above.

Linton

springali said:

Thanks Linton,
The Pension Service tell me that when I elect to take the lump sum I will be asked to tick a box to say that I am a basic rate taxpayer. They will then deduct tax at 20% from the lump sum. I was just concerned that I could get another tax bill when my SA Return is submitted. It seems not and that I can make my judgement on the fact that my total tax bill for the lump that I take will be c £14k.

You will be taking your lumpsum in the next tax year?  I think if you take it this tax year you wont get tthe latest 10% cost of living increase.