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Taking Deferred OAP as a lump sum
in Pensions, annuities & retirement planning
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Pity you cannot dump your other earnings and draw your lump sum next year tax free.
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.
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?
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 🤔
How do I avoid having to complete the SA return?
What has changed since then?
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)?