State Pension

xylophone

See https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/putting-deferring-claiming-state-pension#:~:text=Further information-,Overview,or as extra state pension.

under 

State pension age before 6 April 2016

which has full details and examples.

Cookie1974

So the letter from the DWP stated she can have £264k or extra £500 a week 

GrumpyDil

I don't know the ins and outs here but without wanting to be clinical and given the pension will end on death, surely the only option is to take the lump sum and deal with the tax.  At 500.00 a week it will take 10 years to get paid that 264k, disregarding views about tax etc.

jem16

Dazed_and_C0nfused said:

Secret2ndAccount said:

My comiserations to your family.
Take the lump sum. There is no pot.
I hate to be gruesome here, but I will just stick to the numbers. The lump sum receives special tax treatment. If your mum is normally a 20% taxpayer, the entire lump sum will be taxed at 20%. If you can wait until April, is it possible she will be a 0% taxpayer next tax year? Leaving claiming until then could result in 0% tax on the lump sum.

That isn't quite how it works.

Someone who is a 0% taxpayer would actually be liable to 20% on the lump sum.

I think your taxable income needs to be no more than your Personal Allowance for the lump sum to escape tax.

And something that people sometimes overlook is to count the State Pension itself (not the deferral lump sum) as taxable income once that starts.

You seem to be saying that’s not how it works and then agreeing that it is how it works or am I missing something?

If a person’s total taxable income makes them a non-taxpayer, then the lump sum would be paid totally free of tax. 

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/tax-deferred-state-pension-lump-sums

eastcorkram

jem16 said:

Dazed_and_C0nfused said:

Secret2ndAccount said:

My comiserations to your family.
Take the lump sum. There is no pot.
I hate to be gruesome here, but I will just stick to the numbers. The lump sum receives special tax treatment. If your mum is normally a 20% taxpayer, the entire lump sum will be taxed at 20%. If you can wait until April, is it possible she will be a 0% taxpayer next tax year? Leaving claiming until then could result in 0% tax on the lump sum.

That isn't quite how it works.

Someone who is a 0% taxpayer would actually be liable to 20% on the lump sum.

I think your taxable income needs to be no more than your Personal Allowance for the lump sum to escape tax.

And something that people sometimes overlook is to count the State Pension itself (not the deferral lump sum) as taxable income once that starts.

You seem to be saying that’s not how it works and then agreeing that it is how it works or am I missing something?

If a person’s total taxable income makes them a non-taxpayer, then the lump sum would be paid totally free of tax. 

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/tax-deferred-state-pension-lump-sums

If you're a non tax payer, surely the lump sum, if big enough would just immediately turn you into a tax payer?

Dazed_and_C0nfused

jem16 said:

Dazed_and_C0nfused said:

Secret2ndAccount said:

My comiserations to your family.
Take the lump sum. There is no pot.
I hate to be gruesome here, but I will just stick to the numbers. The lump sum receives special tax treatment. If your mum is normally a 20% taxpayer, the entire lump sum will be taxed at 20%. If you can wait until April, is it possible she will be a 0% taxpayer next tax year? Leaving claiming until then could result in 0% tax on the lump sum.

That isn't quite how it works.

Someone who is a 0% taxpayer would actually be liable to 20% on the lump sum.

I think your taxable income needs to be no more than your Personal Allowance for the lump sum to escape tax.

And something that people sometimes overlook is to count the State Pension itself (not the deferral lump sum) as taxable income once that starts.

You seem to be saying that’s not how it works and then agreeing that it is how it works or am I missing something?

If a person’s total taxable income makes them a non-taxpayer, then the lump sum would be paid totally free of tax. 

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/tax-deferred-state-pension-lump-sums

It's genuinely not that simple.

Say your total taxable income, including any normal State Pension payments you start to receive post deferment, is £8,000.  There would be no tax to pay on the deferral lump sum.

But say your total taxable income was £14,000, again including any normal State Pension payments you start to receive post deferment and there was no tax to pay because of one or more of the three 0% tax bands.  You would be liable to 20% tax on the deferral lump sum.

Have a read of the "Graeme" example in the link you have posted.

Dazed_and_C0nfused

eastcorkram said:

jem16 said:

Dazed_and_C0nfused said:

Secret2ndAccount said:

My comiserations to your family.
Take the lump sum. There is no pot.
I hate to be gruesome here, but I will just stick to the numbers. The lump sum receives special tax treatment. If your mum is normally a 20% taxpayer, the entire lump sum will be taxed at 20%. If you can wait until April, is it possible she will be a 0% taxpayer next tax year? Leaving claiming until then could result in 0% tax on the lump sum.

That isn't quite how it works.

Someone who is a 0% taxpayer would actually be liable to 20% on the lump sum.

I think your taxable income needs to be no more than your Personal Allowance for the lump sum to escape tax.

And something that people sometimes overlook is to count the State Pension itself (not the deferral lump sum) as taxable income once that starts.

You seem to be saying that’s not how it works and then agreeing that it is how it works or am I missing something?

If a person’s total taxable income makes them a non-taxpayer, then the lump sum would be paid totally free of tax. 

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/tax-deferred-state-pension-lump-sums

If you're a non tax payer, surely the lump sum, if big enough would just immediately turn you into a tax payer?

A State Pension deferral lump sum, paid under the pre 2016 rules, has special tax treatment.

It isn't added to your other income and taxed at your marginal rate.

eastcorkram

Dazed_and_C0nfused said:

eastcorkram said:

jem16 said:

Dazed_and_C0nfused said:

Secret2ndAccount said:

My comiserations to your family.
Take the lump sum. There is no pot.
I hate to be gruesome here, but I will just stick to the numbers. The lump sum receives special tax treatment. If your mum is normally a 20% taxpayer, the entire lump sum will be taxed at 20%. If you can wait until April, is it possible she will be a 0% taxpayer next tax year? Leaving claiming until then could result in 0% tax on the lump sum.

That isn't quite how it works.

Someone who is a 0% taxpayer would actually be liable to 20% on the lump sum.

I think your taxable income needs to be no more than your Personal Allowance for the lump sum to escape tax.

And something that people sometimes overlook is to count the State Pension itself (not the deferral lump sum) as taxable income once that starts.

You seem to be saying that’s not how it works and then agreeing that it is how it works or am I missing something?

If a person’s total taxable income makes them a non-taxpayer, then the lump sum would be paid totally free of tax. 

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/tax-deferred-state-pension-lump-sums

If you're a non tax payer, surely the lump sum, if big enough would just immediately turn you into a tax payer?

A State Pension deferral lump sum, paid under the pre 2016 rules, has special tax treatment.

It isn't added to your other income and taxed at your marginal rate.

I'm not sure how it was calculated, but my father in law deferred for around 16 years. He ended up with a slightly higher pension, and a lump sum of £78,738 . They deducted tax of £15,747, and paid him £62,991. 

Dazed_and_C0nfused

eastcorkram said:

Dazed_and_C0nfused said:

eastcorkram said:

jem16 said:

Dazed_and_C0nfused said:

Secret2ndAccount said:

My comiserations to your family.
Take the lump sum. There is no pot.
I hate to be gruesome here, but I will just stick to the numbers. The lump sum receives special tax treatment. If your mum is normally a 20% taxpayer, the entire lump sum will be taxed at 20%. If you can wait until April, is it possible she will be a 0% taxpayer next tax year? Leaving claiming until then could result in 0% tax on the lump sum.

That isn't quite how it works.

Someone who is a 0% taxpayer would actually be liable to 20% on the lump sum.

I think your taxable income needs to be no more than your Personal Allowance for the lump sum to escape tax.

And something that people sometimes overlook is to count the State Pension itself (not the deferral lump sum) as taxable income once that starts.

You seem to be saying that’s not how it works and then agreeing that it is how it works or am I missing something?

If a person’s total taxable income makes them a non-taxpayer, then the lump sum would be paid totally free of tax. 

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/tax-deferred-state-pension-lump-sums

If you're a non tax payer, surely the lump sum, if big enough would just immediately turn you into a tax payer?

A State Pension deferral lump sum, paid under the pre 2016 rules, has special tax treatment.

It isn't added to your other income and taxed at your marginal rate.

I'm not sure how it was calculated, but my father in law deferred for around 16 years. He ended up with a slightly higher pension, and a lump sum of £78,738 . They deducted tax of £15,747, and paid him £62,991. 

DWP would have asked him to complete a form declaring his tax position.

If he didn't do that then I believe their default approach is to deduct basic rate tax.

pinnks

The lump sum is charged at your marginal rate of tax for the year in which the lump sum is paid.  So, if your taxable income, absent the lump sum, is less than your personal (and any other) allowance, your marginal rate would be 0% and no tax would be due.  If your income exceeds your allowances, then the lump sum would be taxed at 20% (unless higher rates were in the mix, which seems unlikely in most cases).

To be honest I think that is what both jem16 and Dazed_and_C0nfused were saying...