State Pension

pinnks

Cookie1974 said:

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

Given the age of the recipient, I would opt for the lump sum - a bird in the hand, as it were.

QrizB

Cookie1974 said:

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

What income has she had this year, so far? Enough to make her a basic rate taxpayer?

Assuming that she is a basic rate taxpayer, if she takes the £264k she'll be liable for 20% (£52800) in tax and will be £211,200 better off.

If she doesn't take the lump sum, she'll instead pay 20% tax (£100 a week) on the £500 a week and be £400 a week better off for the rest of her life. As previously said, it will take about ten years for her to break even.

jem16

Dazed_and_C0nfused 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

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.

So basically you’re agreeing with what I said and which you’ve highlighted. 

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

If you had £14k of taxable income then of course you wouldn’t be a non-taxpayer. 

jem16

pinnks said:

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...

Thanks. It’s exactly what I was saying although I’m not sure why Dazed and Confused thought otherwise.

Dazed_and_C0nfused

jem16 said:

Dazed_and_C0nfused 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

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.

So basically you’re agreeing with what I said and which you’ve highlighted. 

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

If you had £14k of taxable income then of course you wouldn’t be a non-taxpayer. 

We clearly have different definitions of what a non taxpayer means then!

To me it is someone who doesn't have a tax liability.

How much tax would someone with pension of £11,500 and untaxed interest of £2,500 have to pay.  Using the standard Personal Allowance of £12,570 and current tax year rates and rate band?

jem16

Dazed_and_C0nfused said:

Gjem16 said:

Dazed_and_C0nfused 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

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.

So basically you’re agreeing with what I said and which you’ve highlighted. 

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

If you had £14k of taxable income then of course you wouldn’t be a non-taxpayer. 

We clearly have different definitions of what a non taxpayer means then!

To me it is someone who doesn't have a tax liability.

How much tax would someone with pension of £11,500 and untaxed interest of £2,500 have to pay.  Using the standard Personal Allowance of £12,570 and current tax year rates and rate band?

Ah ok I can see where you’re coming from now. In your example there would be no tax to pay because of the various 0% rates.

My definition of a non-taxpayer is someone who has no liability for tax even at 0%.