Taking Deferred OAP as a lump sum 6 March at 5:53PM in Pensions, annuities & retirement planning 22 replies 681 views

springali

I can take bit whenever it's best.

Ganga

As you would have got your SP before 2016 you pay tax at your normal rate when you get your lump sum ,in your case tax rate 20% thats what you pay full stop,the lump sum cannot be added to your taxable earnings and taxed again.
Pity you cannot dump your other earnings and draw your lump sum next year tax free. 

pem2

You will have the choice to elect the current year you claim or previous, whatever is advantageous to you i.e if your taxable income was less than the threshold of £12570 than you claim you are a nil taxpayer and choose that year. State pension lump sums are treated differently. The following article is worth reading, it helped me as a deferred SP claimant of the same age as you.

https://www.taxadvisermagazine.com/article/lump-sums

Dazed_and_C0nfused

springali said:

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.

I suspect your IFA hasn't come across this scenario before.

There are special rules for pre 2016 deferrals where a lump sum is taken rather than an increased pension.

If your income, excluding the deferral lump sum falls into the basic rate band then you will need to pay 20% on it.  

You still need to declare it on your Self Assessment return and you will see a 20% tax charge.  Offset by the 20% tax DWP will be deducting.

It is easy to make mistakes though, some people have forgotten to include the State Pension which starts after the deferral ends and this has moved them from one tax band to another.  Which would be a very expensive mistake on a £70k lump sum.

You should also be aware that being taxed at 0% on dividends or interest (above the Personal Allowance) counts as being a basic rate taxpayer when it comes to the State Pension deferral lump sum.

springali

Thanks again to everyone. I have read all of the links - though I wouldn't want to be tested on my understanding:) - but I think I am clear and I am very grateful. To summarise:
I have two small private occupational pensions of about £9k each and if I take my lump sum of c £70k after April 5th my state pension in the year to Apl 24 will be c £8.5k so my total pension income in that tax year will be c £25.5k. I have some modest interest and dividend income outside of a SIPP that I do not draw from. On that basis the total tax I should pay on my lump sum drawdown will be c.£14k and I cannot mitigate that further but should not fear a higher tax bill either?

Dazed_and_C0nfused

springali said:

Thanks again to everyone. I have read all of the links - though I wouldn't want to be tested on my understanding:) - but I think I am clear and I am very grateful. To summarise:
I have two small private occupational pensions of about £9k each and if I take my lump sum of c £70k after April 5th my state pension in the year to Apl 24 will be c £8.5k so my total pension income in that tax year will be c £25.5k. I have some modest interest and dividend income outside of a SIPP that I do not draw from. On that basis the total tax I should pay on my lump sum drawdown will be c.£14k and I cannot mitigate that further but should not fear a higher tax bill either?

Yes, based on your latest post you have a fair bit of headroom before getting into higher rate territory.  Even if Scottish resident for tax purposes.

So providing modest interest/dividends means four figures or less (combined) you should be fine.

Although it does beg the question as to why you are completing Self Assessment returns 🤔

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? 

springali

Thanks Dazed, I'm not a Scottish resident and interest and divs outside of SIPP and Isas were c £1200 last tax year.
How do I avoid having to complete the SA return?

Dazed_and_C0nfused

springali said:

Thanks Dazed, I'm not a Scottish resident and interest and divs outside of SIPP and Isas were c £1200 last tax year.
How do I avoid having to complete the SA return?

I think the starring point is to understand why you started completing them in the first place?

What has changed since then?

springali

Thanks Dazed,  The. SA Returns were needed to Tax Y/e 2019 as I had an LLP and a Trust that was in receipt of dividends from a Pvt Company. That stopped in 2019. I had previously been self employed for several years.

springali

Thanks Ganga,
Your last sentence got me thinking. My only income is currently the two small occupational pensions of c £9k each and a small amount of divs and income outside my Sipp and ISA. When I elect to start taking my OAP I will get an additional c £8.5k pa.
I would assume that there are anti avoidance provisions that would prevent me asking my occupational pension providers to suspend and accrue my private pensions to get my marginal tax rate to nil and therefore mean that my lump sum is not taxed. If this were allowed I would increase my tax bill in the following tax year but that would be an increase of £3.6k (20% 0f deferred pension of £18k) versus £14k (20% of deferred OAP of £70k)?