Deferred Private Pension Lump Sum

Fee82

Hi all,

My wife is 62 and planned on retiring at 65 (state pension 67). She just realised that her private pension was payable at 60. We now understand that the monies she should have been receiving for the past 2 years are essentially being saved up to give her at the point she decides to start receiving this pension. We thought (wrongly) that she would be able to take this arrears of payment tax free instead of her 25% tax free sum. Now we understand it will be taxed and so I'm trying to work out how best to do this so we don't lose too much to the taxperson.

She currently has 2 yrs of arrears of payments that total approx £29,000. She will then start receiving a pension of £11,500pa. Her income at the moment is approx £25,000 per year.

So, if she takes the pension now her taxable income this year will be £29,000+£25,000+£4800 (monthly pension payments for the rest of the year) = £59800. Obviously pushing her slightly into the higher tax bracket.

If she waits until 65, she will receive a projected figure of £58,000 but her monthly payments are likely to be higher because she's left the money in the pension longer.

I'm also not sure if we are best to take the tax free lump sum options and stick them in savings, accepting the lower monthly payment which will be subject to tax.

I'm so confused and not sure what option is best.

Any thoughts are welcomed.

TIA.

Brie

I took tax free lump sums with mine to put in a high interest savings account with the balance being paid & taxed monthly leaving myself in the lower tax bracket. Big expenses can be paid out of the savings if and when - just need to keep an eye on the interest received in case it means that a tax self assessment is required.

Alternatives might be that she consider either not take the back dated pension but simply start receiving her pension which may be a slightly higher amount than you have mentioned but not into the higher tax bracket or do as you have outlined but putting more of her current pay into her active work pension. Either way she should be able to avoid at least some of the higher tax.

Albermarle

If she waits until 65, she will receive a projected figure of £58,000 but her monthly payments are likely to be higher because she's left the money in the pension longer.

Normally in this situation, you would receive the deferred payments as if the pension started at 60, and the payments would cover the missing years. I think that is what you are saying will happen? In that case you would think you would not expect to also get a higher pension because the money has been left in the pension, because the pension has effectively being paid since age 60? You can't have your cake and eat it so to speak.

I'm also not sure if we are best to take the tax free lump sum options and stick them in savings, accepting the lower monthly payment which will be subject to tax.

This is a very common question and depends partly on the commutation rate. Which is the ratio between the size of the lump sum and how much the pension is reduced if you take the lump sum. Also whether you need the cash and how good the terms of the pension are ( inflation linked etc /)

On-the-coast

As long as your wife doesn’t need maximum cash now - and it sounds as though she doesn’t, then putting 10k in her existing work pension now would effectively save you from higher rate tax this year.

I don’t think this is recycling because it’s not tax free cash.
but see here for discussion: https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

Marcon

She currently has 2 yrs of arrears of payments that total approx £29,000. She will then start receiving a pension of £11,500pa. Her income at the moment is approx £25,000 per year. 

So, if she takes the pension now her taxable income this year will be £29,000+£25,000+£4800 (monthly pension payments for the rest of the year) = £59800. Obviously pushing her slightly into the higher tax bracket. 

If your wife became entitled to payments starting from the age of 60 and must take these as 'backdated' payments when her pension comes into payment, which is what I think you're saying, then there's good news on the tax front. See my post of 2 June 2025 in this thread:

https://forums.moneysavingexpert.com/discussion/6610482/civil-service-pension-tax

If she waits until 65, she will receive a projected figure of £58,000 but her monthly payments are likely to be higher because she's left the money in the pension longer.

Normally in this situation, you would receive the deferred payments as if the pension started at 60, and the payments would cover the missing years. I think that is what you are saying will happen? In that case you would think you would not expect to also get a higher pension because the money has been left in the pension, because the pension has effectively being paid since age 60? You can't have your cake and eat it so to speak.

If she receives a payment representing her pension backdated to age 60, then going forward the lady concerned would get a higher monthly pension than the current figures, because there will have been annual inflation-related increases for the years between reaching age 60, and starting to take her pension.

OP, I've a nasty feeling this must be close to 'clear as mud' to someone grappling with this for the first time. Please come back with any further questions if our collective endeavours to help haven't cracked it for you and your wife! If you could also clarify the scheme in question (from what you've said, I suspect this might be NHS or Civil Service?) that would be helpful.

Fee82

Thanks all.

Yes 'clear as mud' it is! Although I think this thread is starting to make it feel clearer.

The pension was from British Gas (Cadent) 25+yrs ago. It says that if we don't request the backdated payments when we commence it then we lose them for good 😮. They do offer a one off free meeting with an advisor so I plan I take this asap.

It's right that we don't need the pension right now. By following the advice on this forum we paid our mortgage off really early (I was 40yrs old 😀) and have ever since led quite a frugal life, only really splashing out on travel. Any money we get will go into savings to bridge the gap between her retiring at 65 and SPA. In addition, I am 18 years younger than her so I plan to really reduce my work at that point to maximise the time we have together.

Understanding that we can ask for a breakdown of the back dated payment and then ask HMRC to apply the payments to the relevant tax year is incredibly helpful. It should mean that we lose 20% to tax and not push her into the higher tax bracket.

She is now self-emplyed and has no current pension that she pays into. However she has a few smaller pensions that also mature at different times. I need to look at those too but it's the Cadent pension that is by far the biggest and therefore the one I need to get right.

What I guess was hardest to understand was why we could take a 25% lump sum of £55k but couldn't leave that and have the backdated £29k as tax free instead.

Thank you for all your advice. It's given me lots to think about and reduced my initial panic. Any further thoughts are really appreciated.

Marcon

The pension was from British Gas (Cadent) 25+yrs ago. It says that if we don't request the backdated payments when we commence it then we lose them for good 😮. They do offer a one off free meeting with an advisor so I plan I take this asap.

This bit looks simple - if it's a case of either 'take it or lose it' that sounds a straightforward decision, but even so, if there's free advice going, take advantage of it - good plan!

She is now self-emplyed and has no current pension that she pays into. However she has a few smaller pensions that also mature at different times. I need to look at those too but it's the Cadent pension that is by far the biggest and therefore the one I need to get right.

Are you sure none of these smaller pensions will accept contributions from her now? If they won't, then there is nothing to stop her starting a personal pension and paying into that if she wishes to do so. She can contribute the greater of £2,880 (which the provider will gross up to £3,600 by adding basic rate relief to her 'pot') or her net profits for the tax year (again, she'd pay in 80% of those and the provider would add the basic rate relief).

From the sound of it, there's not much to 'get right' with the Cadent pension - it looks a pretty clear cut decision - but happily there's free advice on offer to give you reassurance.

What I guess was hardest to understand was why we could take a 25% lump sum of £55k but couldn't leave that and have the backdated £29k as tax free instead. 

Because it's a 'defined benefit' scheme and neither the rules of the Cadent scheme, nor general legislation, would let you do that. Never try to apply logic or common sense to pensions…

Fee82

Thanks @Marcon.

Do you think she's be better to start another pension or just to put money into savings at this point?

This is really making me think about my pension too. I pay £4k into a LISA each year. I'm not sure if that's best…. especially as someone who's self-employed. I can pay in until I'm 50 (I'm 44 now)…. not sure what to do after that.

"Never try to apply logic or common sense to pensions…" made me giggle. I've been really good with finances my whole life. I was homeless in my teens following my parents break up and I think that prompted a good attitude to money. Pensions is one area I have avoided though. It's SO confusing with all the options out there.

Comments on here are really appreciated.

Marcon

Do you think she's be better to start another pension or just to put money into savings at this point?

Before considering either, what's her state pension forecast look like? See https://www.gov.uk/check-state-pension

Even if she already has '35 years of contributions' that doesn't, contrary to what you read regularly in the media, mean she's on course for a full state pension. You need to look at and read the text included in the forecast - not just the number on the first page in large type! If she has any gaps in the last six years, it's possible that one of her best investments could be filling those gaps.

Marcon

This is really making me think about my pension too. I pay £4k into a LISA each year. I'm not sure if that's best…. especially as someone who's self-employed. I can pay in until I'm 50 (I'm 44 now)…. not sure what to do after that.

While I think of it - when you/your wife speaks to the advisor about the Cadent pension, ask about the pension you'd receive if you outlive your wife, specifically pointing out the age gap between you. Where (as here) there's quite a big difference in age, it isn't safe to rely on a vague reference to a spouse 'getting x% of the member's pension'.

Some defined benefit schemes (not all - and I've no idea what Cadent does) apply something which, for self-evident reasons, is called a 'young spouse reduction factor'. If a spouse is much younger than the member, the scheme can expect to pay out any spousal pension for a much longer period than if the age gap had been smaller, so any spousal pension is reduced to take this into account.

Fee82

Thanks again @Marcon. I've checked her state pension forecast and it says she's paid the max for the past 6 years and can't pay any more.

I will check about the 'young spouse' part of her cadent pension and also see if there are other clauses. I know with one of her small pensions I stop getting it if I remarry or cohabit.

So, would I be best to explore new pensions for us both or just continue with savings as we are now?