Lump sum taxable?

Zudecke_2
Zudecke_2 Posts: 47 Forumite
in Pensions, annuities & retirement planning
Hi all,

My mum has deferred her state pension for 3 years (in July).

We want to know the tax liability based on a new financial year, for both scenarios:
1) financial year with no income
2) fresh financial year with £9,250 income (from part time work)

The state pension pamphlet is just directing us in circles and we're tearing our hair out :(.

Many thanks

Z
«1

Comments

  • Dazed_and_confused
    Dazed_and_confused Posts: 6,458 Forumite
    Uniform Washer
    edited 19 March 2017 at 10:08PM
    In simple terms the tax is calculated according to the tax rate on her other income, ignoring the lump sum so assuming she gets a UK personal tax allowance, currently £11000 and £11500 from April 2017, she could have no tax to pay on the other income so also no tax on the lump sum.

    Remember however you must include all taxable income in your calculations, including things like savings interest (not ISA's) or other pensions, not just wages. The normal state pension payments received need to be included so scenario 1 appears impossible and 2 is understating the income as the state pension doesn't sound like it's included in the £9250

    It is entirely possible wages of £9250 and part years state pension will make op's mum a basic rate payer so 20% tax would be due on the lump sum
  • BobQ
    BobQ Posts: 11,181 Forumite
    First Anniversary Name Dropper First Post Combo Breaker
    Zudecke wrote: »
    Hi all,

    My mum has deferred her state pension for 3 years (in July).

    We want to know the tax liability based on a new financial year, for both scenarios:
    1) financial year with no income
    2) fresh financial year with £9,250 income (from part time work)

    The state pension pamphlet is just directing us in circles and we're tearing our hair out :(.

    Many thanks

    Z

    What lump sum
    Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.
  • Flugelhorn
    Flugelhorn Posts: 5,553 Forumite
    First Anniversary Name Dropper First Post
    Presumably this lump sum https://www.gov.uk/deferring-state-pension/what-you-get
  • Zudecke_2
    Zudecke_2 Posts: 47 Forumite
    So if the annual allowance is £11.5k and her lump sum is £21k and she has no other income expected for the financial year, what would her tax liability?
  • Dazed_and_confused
    Dazed_and_confused Posts: 6,458 Forumite
    Uniform Washer
    There wouldn't be any tax liability.

    But how are you expecting her to have no other income? What is happening to the normal state pension payments which are presumably payable once the lump sum is taken?
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    First Anniversary Name Dropper First Post Combo Breaker
    Dazed_and_confused wrote: »
    There wouldn't be any tax liability.

    But how are you expecting her to have no other income? What is happening to the normal state pension payments which are presumably payable once the lump sum is taken?

    Exactly. If she is hoping to get the lump sum free of tax she'd have to restart her state pension late in the tax year 17/18 so that she'd be under the Personal Allowance.

    Or even late in 16/17: I wonder whether the Pension Service could rise to the challenge of crediting her with her pension starting in the next few weeks.
    Free the dunston one next time too.
  • xylophone
    xylophone Posts: 44,343 Forumite
    Name Dropper First Anniversary First Post
    http://www.litrg.org.uk/tax-guides/pensioners-and-tax/what-state-pension-deferral


    http://www.litrg.org.uk/tax-guides/pensioners-and-tax/what-tax-do-i-pay-my-state-pension-lump-sum
  • Bettie
    Bettie Posts: 1,225 Forumite
    First Anniversary First Post
    I think I am right in saying that you can take the state pension and defer the lump sum to a more favourable tax year so avoiding tax. As the interest rate is better than any of my other accounts then I am leaving mine in for a bit longer.
  • Zudecke_2
    Zudecke_2 Posts: 47 Forumite
    I don't think you can take the state pension whilst continuing to defer the lump sum accrued? I thought it was one or the other? And once you START taking the pension, the lump sum HAS TO BE released to the pensioner?

    And yes, her only income in the theoretical scenario would be the £139 p/W state pension.

    So in the scenario where she's getting £139p/w state pension and thus releases the lump, how is her liability calculated?

    (assuming, again, no other income whatsoever, nor any capital or investments)
  • greenglide
    greenglide Posts: 3,301 Forumite
    First Anniversary Combo Breaker Hung up my suit!
    I don't think you can take the state pension whilst continuing to defer the lump sum accrued? I thought it was one or the other? And once you START taking the pension, the lump sum HAS TO BE released to the pensioner?
    But what you can do is choose which tax year the lump sum is taxed in. I have never understood how this works but it can move it to a tax year with less or no tax liability!

    The lump sum must be taken when payment of the pension is taken.
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