Deferred State Pension

dealyboy

@Dazed_and_C0nfused said:

lump sum payment
... so in order for backdating to be available a claim has to be within the 12 months following the date of achieving state pension age

@dealyboy

Do you have a source for that?

I'm not disputing that a backdating payment is limited to a maximum of 12 months but I'm struggling to find anything that says you couldn't  defer for say 5 years and then when you decide to claim you can have the first 4 years treated as deferred (extra weekly pension) and the last 12 months as a backdated (lump sum) payment.

... yes I referred to the current Age UK FS19 factsheet earlier (https://forums.moneysavingexpert.com/discussion/comment/81279006/#Comment_81279006) ... https://www.ageuk.org.uk/siteassets/documents/factsheets/fs19_state_pension_fcs.pdf section 6.1 paragraph 3

and

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/a-guide-to-tax-in-retirement#:~:text=Up to 12 months of,originally due to be paid.

molerat

Agree with D&C

https://www.legislation.gov.uk/ukpga/2014/19/section/16

(6)Regulations may allow a person who has opted to suspend his or her entitlement to a state pension under this Part to cancel the exercise of that option (in whole or in part) in relation to a past period.

https://www.legislation.gov.uk/uksi/2015/173/regulation/9

Cancelling a suspension of a state pension

9.—(1) Where a person has opted to suspend their entitlement to a state pension under Part 1 of the 2014 Act, the person may cancel the exercise of that option in relation to the whole of, or part of, a past period referred to in paragraph (3).

(2) The person cancels the suspension by making a claim for their state pension whilst their state pension is suspended.

(3) The past period mentioned in paragraph (1) is any period of up to 12 months before the date on which the person cancels the suspension.

dealyboy

Steve Webb, former Pensions Minister and contributor to This Is Money website agrees with D&C ...
https://www.thisismoney.co.uk/money/pensions/article-11215871/How-end-state-pension-deferral-two-years.html

@Dazed_and_C0nfused  

1957DfurdPensionist

@dealyboy, wow, again you've come up trumps with that 2½ year old pointer from the ex. Govt. main new State Pensions architect or implementer 'imself, Steve Webb  -  so it looks like DWP have sort of done the same thing with me.  That is except that instead of giving me the max 12 months backdated from now, the realtime point they've finally got around to processing my claim, they've got hung up with the actual date I put in the claim and started the backdate period around 12 months before that.  So they've extended the 12 months backdate period by the backlog!  Not entirely in my best interests that because there ain't no interest given for any part of the backdate period.

At the same time, they "accommodated" my request to make the period between my 66th birthday and the start of the backdate a multiple of 9 weeks, but in retrospect, and with what you clarified yesterday, @dealyboy, there was no need for 9 week multiples once that first period exceeded 9 weeks (thanks again for that cleared up query also!).

So what's best for me now if I still want a lump sum option?  Well, I think the plan now is simply to persuade DWP to shorten the backdate to 12 months or less, and thus enhance the 1/9% pw deferral calculation at the front end.  The reason I am looking at going for the lump sum at all is just to try to save paying any tax whilst the personal allowance remains fixed at £12,570 until April 2028.  As one of the UK's great unwashed economically inactive in the current tax year, I don't have any other tax liability this year.  Even if I skipped the lump sum, and started my pension at the highest weekly amount I could (that's about £12,900pa after the April 2025 Triple Lock, it wouldn't incur very much tax I know.  It'd only be around £66 in 25/26 and only increase as a result of the Triple Lock or a tiny bit of CPI over the next 2 years after that.  That is at least whilst I am not receiving any other income (e.g. from untouched private pension bits and bobs).

Taking a 12 month lump sum I reckon might reduce my post April 2025/26 pension to around £230pw (£11,960 - no tax, and probably no tax in 2026/27.

So as some might say, a backdated £12K bird in the hand in 2025 could be worth 1½ times the time it otherwise takes to drag an extra £18pw for 20 odd more years from the DWP bush! £18pw x 52 x 20 = ~£18K after a bit of tax!

Sorry, did I murder a metaphor there? 

I don't desperately need the lump sum but what would other forumites do with the choice - £12,000 lump plus an index-linked pension starting a £230pw for last 20 years or so of life or no lump and the pension starting at £250pw?

Dazed_and_C0nfused

1957DfurdPensionist said:

@dealyboy, wow, again you've come up trumps with that 2½ year old pointer from the ex. Govt. main new State Pensions architect or implementer 'imself, Steve Webb  -  so it looks like DWP have sort of done the same thing with me.  That is except that instead of giving me the max 12 months backdated from now, the realtime point they've finally got around to processing my claim, they've got hung up with the actual date I put in the claim and started the backdate period around 12 months before that.  So they've extended the 12 months backdate period by the backlog!  Not entirely in my best interests that because there ain't no interest given for any part of the backdate period.

At the same time, they "accommodated" my request to make the period between my 66th birthday and the start of the backdate a multiple of 9 weeks, but in retrospect, and with what you clarified yesterday, @dealyboy, there was no need for 9 week multiples once that first period exceeded 9 weeks (thanks again for that cleared up query also!).

So what's best for me now if I still want a lump sum option?  Well, I think the plan now is simply to persuade DWP to shorten the backdate to 12 months or less, and thus enhance the 1/9% pw deferral calculation at the front end.  The reason I am looking at going for the lump sum at all is just to try to save paying any tax whilst the personal allowance remains fixed at £12,570 until April 2028.  As one of the UK's great unwashed economically inactive in the current tax year, I don't have any other tax liability this year.  Even if I skipped the lump sum, and started my pension at the highest weekly amount I could (that's about £12,900pa after the April 2025 Triple Lock, it wouldn't incur very much tax I know.  It'd only be around £66 in 25/26 and only increase as a result of the Triple Lock or a tiny bit of CPI over the next 2 years after that.  That is at least whilst I am not receiving any other income (e.g. from untouched private pension bits and bobs).

Taking a 12 month lump sum I reckon might reduce my post April 2025/26 pension to around £230pw (£11,960 - no tax, and probably no tax in 2026/27.

So as some might say, a backdated £12K bird in the hand in 2025 could be worth 1½ times the time it otherwise takes to drag an extra £18pw for 20 odd more years from the DWP bush! £18pw x 52 x 20 = ~£18K after a bit of tax!

Sorry, did I murder a metaphor there? 

I don't desperately need the lump sum but what would other forumites do with the choice - £12,000 lump plus an index-linked pension starting a £230pw for last 20 years or so of life or no lump and the pension starting at £250pw?

As it stands it looks like some of your backdating lump sum would be taxable in the 2023-24 tax year.  

Is that a tax year where you have sufficient unused Personal Allowance to avoid any actual liability on it or will that result in there being tax to pay? 

And if it did create a liability for 2023-24 is there a possibility it could be at an effective rate of 40% because of the impact of losing some savings starter rate band?  Or even just being extra income in the 40% rate band if you had a lot of income in 2023-24?

1957DfurdPensionist

Thanks D&C, that was going to be my next question - it seemed I was reading in this forum or in the links recently provided that taxing the lump sum in the old State pension way was different to taxing in the nSP way.  One way placed the tax liability for each backdated week in the tax year in which it would have been paid if it had not been deferred.  And that's your point of warning here (thanks again).   The other way is of course taxation of the lump sum at the point/date it is paid.

To be honest, I am still confused as to which would actually apply and why.

And going back to my last question last night - I had a brainwave before I slept based not on the "break-even" period test others have promoted, but rather to reverse compare the lump sum with what a typical annuity might pay.
Putting £12,000 into an annuity at my age I would guess might earn a level £600pa (5%).  That's about £11.50pw.  Maybe a percent or two more, but said annuity would need to pay 7.8% level pa. to match that extra £18pw I calculated (£248 v. £230pw) by leaving the £12,000 with DWP.

A level annuity rate of 7.8%pa might be a typical "enhanced annuity rate" for someone with proven poor health I think?

So although extra tax liability in 23/24 doesn't concern me one way or t'other, I am now erring on going for the higher weekly amount, despite immediately becoming liable for that £66 tax tickle in 25/26 and climbing modestly thereafter ...

Dazed_and_C0nfused

1957DfurdPensionist said:

Thanks D&C, that was going to be my next question - it seemed I was reading in this forum or in the links recently provided that taxing the lump sum in the old State pension way was different to taxing in the nSP way.  One way placed the tax liability for each backdated week in the tax year in which it would have been paid if it had not been deferred.  And that's your point of warning here (thanks again).   The other way is of course taxation of the lump sum at the point/date it is paid.

To be honest, I am still confused as to which would actually apply and why.

And going back to my last question last night - I had a brainwave before I slept based not on the "break-even" period test others have promoted, but rather to reverse compare the lump sum with what a typical annuity might pay.
Putting £12,000 into an annuity at my age I would guess might earn a level £600pa (5%).  That's about £11.50pw.  Maybe a percent or two more, but said annuity would need to pay 7.8% level pa. to match that extra £18pw I calculated (£248 v. £230pw) by leaving the £12,000 with DWP.

A level annuity rate of 7.8%pa might be a typical "enhanced annuity rate" for someone with proven poor health I think?

So although extra tax liability in 23/24 doesn't concern me one way or t'other, I am now erring on going for the higher weekly amount, despite immediately becoming liable for that £66 tax tickle in 25/26 and climbing modestly thereafter ...

As your State Pension age is after 5 April 2016 you do not have the option of a State Pension deferral lump sum.

You are under the new rules where the only thing you can achieve by deferring is to take an increased weekly award.  Which is slightly complicated by the fact that you can backdate your claim by a period of upto 12 months. 

DWP would have to pay that 12 months backdating in a lump sum but as far as tax is concerned you have been entitled to £x/week* since the date you backdated your claim to.  You cannot receive a lump sum in the sense of the old State Pension deferral lump sum rules.

*potentially two different rates if the backdating spans 2 tax years

1957DfurdPensionist

Thanks D&C, so the slightly complicated thing is the fact I can "backdate your claim by ...up to 12 months".  Backdate from when? Now?  Or from the date nearly 4 months ago when I first called to claim?

And then remember that they have offered a lump sum which covers longer than 12 months - for a sum of some £13K+ in fact.

I regret to say I am still confused!  Are you also a bit confused by my reported offer?

Dazed_and_C0nfused

1957DfurdPensionist said:

Thanks D&C, so the slightly complicated thing is the fact I can "backdate your claim by ...up to 12 months".  Backdate from when? Now?  Or from the date nearly 4 months ago when I first called to claim?

And then remember that they have offered a lump sum which covers longer than 12 months - for a sum of some £13K+ in fact.

I regret to say I am still confused!  Are you also a bit confused by my reported offer?

The only bit I am confused by is whether you have the ability to change the start date you have already notified DWP of.

But let's say you can't (or don't want to).  And your State Pension age is after 5 April 2016.  And you asked to stop deferral wef say 20/10/2023 (12 months prior to when you contacted DWP nearly 4 months ago).

For the period from your State Pension age to 20/10/2023 you accrued additional State Pension (the 1% for every 9 weeks system).  There is no State pension entitlement for you to be taxed on in respect of this period.

For the period from 20/10/2023 to 19/10/2024 you will be entitled to a lump sum relating to the period you have asked for backdating to apply.

For the period from 20/10/2024 till DWP start making weekly/4 weekly payments to you you will be entitled to a lump sum relating to the period DWP have been bringing your claim into payment.

For 2023-24 HMRC should then recalculate your tax liability using ~24 weeks of your 2023-24 State Pension award (or you need to amend your Self Assessment return to include this income if you filed one).

For 2024-25 you will be taxable on 1 week of the 2023-24 rate and 51 weeks of the new 2024-25 rate.

As you have a post 5 April 2016 State Pension age none of the State Pension is a "deferral lump sum" which would have had its own unique tax rules.  LITRG have details about those rules here.  But they cannot apply to you.

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

1957DfurdPensionist

Dazed_and_C0nfused, what a truly excellent and tremendously helpful post.  Thank you so much for your time on this.  I trust others who find they are in, or plan to put themselves in a similar situation will also find this of great help.

Thousand thanks, as they say where I reckon I'll retire and enjoy things, happy in the knowledge that I understood the entitlements and calculations before the off!

PS Re:

The only bit I am confused by is whether you have the ability to change the start date you have already notified DWP of.

My feeling about that minor accommodation it seems I have been offered, was that the agent, whilst tremendously on the ball with the rapid on the spot recalculations using 1/9%pw did not know of the fact that once past the first 9 weeks, the calculation was still applied for all subsequent weeks and not just in whole 9 week multiples.  So in my exact case my SPa already predated my October 2024 claim date minus 12 months by a middling multiple of 9 weeks + some odd number of weeks, and in our joint misunderstanding they kindly agreed to shorten the backdate by a few extra weeks to make the initial deferred period up to the next 9 week multiple (18 weeks)!