Deferring a State Pension

Yes, whenever you take your lump sum you will be taxed on it. I deferred my pension and didn't take the lump sum but now have a significantly bigger weekly pension. It is uprated each year along with the basic one so keeps growing. I researched long and hard and it seemed to work out that if you lived for 10 years after taking you deferred pension you would be better off than taking a lump sum.

I also take it weekly as monthly it is in areers.

Surely weekly is in arrears, too, Alison - albeit only a week?!

Yes Ana but you still get it quicker than if you get it monthly! Rather in my bank than theirs!

If you haven't already seen it, this may be helpful:
www.direct.gov.uk/prod_consum_dg/groups/dg_digitalassets/@dg/@en/@over50/documents/digitalasset/dg_200597.pdf
If you claim a lump sum or extra pension, I guess it makes sense to do so when your tax rate is at its lowest, unless there are more compelling reasons for making the claim. It seems that, where applicable, extra pension builds up at 10.4% pa while a deferred lump attracts 2% above the Bank of England base rate. Sadly, it's only 0.5% at the moment.

And where else could your 'savings' get 10.4%!

I don't think you are not getting 10.4% on your 'savings'. You are getting an extra 10.4% pa, less tax, on your pension. This is the combination of a return on the money you have not claimed and compensation for the fact that you will not be receiving your pension for as long as you would have, if you had claimed at retirement age. It might be a good deal, if you live long enough, but I don't think it is correct to compare 10.4% with normal savings rates.

Ah the pension. To take or not to take. That is the question. Whether 'tis best to defer or take; work til you drop or retire and try to scrape by. The problem is, governments keep moving the wretched goal posts! Once upon a time I could have retired last year at 60, now it's this year at 61 and a bit, and, if I defer it, they'll probably move the goal posts AGAIN so that I have to work for a few more years. I agree with Alison - rather in my bank then theirs!

Frankel - I followed your link to the Deferred Pension information, read the first part really quite attentively, then the middle bit sort of got skimmed over but I confess to my eyes glazing over and I almost lost the will to live by the time I got to the last bit!

I should have added a drowsiness warning - or advice from Stodge Aware that this document should only be read in small doses. I was hoping the section on taxation would answer Mischief's question but I hadn't realised the real danger of an unsuspecting Nan inadvertently over-indulging. I hope you accept my sincere apology and not resort to Sue, Grabbit and Runne to claim compensation. It could, of course, be a Godsend on a sleepless night so maybe some good will result. I hope so.

You are funny, Frankel!

And on a serious note Six years ago a friend and I made different decisions about this, now I am getting quite a lot more in pension than she is and I know that this larger amount will be uprated by CPI or 2.5%, whichever is the greatest, each year so the differential will continue to grow. As an ardent listener of onsumer programmes it is my opinion that deferring one's pension, if you can, is a 'no-brainer'

I think deferring pension works out financially for the person who survives long enough - which obviously you know only with hindsight. The decision to defer is, therefore, about your life expectancy as well as the rates of return. For example, if you give up £5,000 but pick up an extra £10 per week for life after a year, you may gain or lose financially depending on how long you live. I don't think it's a 'no brainer'. Or am I missing something?

Frankel you only gain if you live for another 10 years. I think most people in their 60s would expect to do that. Anything after 10 years is pure profit! I don't think that figure took into account the extra you get each year with the uprating either. I suppose that if you know you have a life-limiting illness it is a different matter.

A relatively fit lady could well make a different decision to a relatively unfit man, the more so while women retire earlier than men. Also, life-style factors (like smoking and obesity) can affect life expectancy, not just just life-limiting illness. There are a number of factors for individuals to consider - so that's why I don't think it's a 'no brainer'.

Well I'm impressed Gransnetters. You all sound very knowledgeable. However, what I really wanted to know is: If I give up work and take my state pension, so that is my only income, and I'm not paying tax, and defer my lump sum for a further year, so I don't collect the lump sum until the next tax year, would I pay any tax. I read the article Frankel (mmm interesting) and it seems to say that I won't.

So, in other words, if I defer the lump sum for another year after taking the state pension and I'm not paying tax, then when I take the lump sum in the next tax year, as the tax is calculated on the previous year when I was paying no tax, I shouldn't pay any. Do you agree?

Going to go and have a long bath and a glass of wine to unscramble the brain.

mischief my understanding is that you have to take the pension at the same time as you take the accrued lump sum. If you are not paying tax at all, I believe that the lump sum would also be tax-free as it is taxed at the rate you pay tax on your other income (per the Pensions leaflet featured earlier in this topic).

We are interested in this as DH has deferred taking his state pension for 5 years and we are obviously keen to avoid tax if possible. I think you should ask the Pensions people for a definitive answer though - don't make a decision based on what we all say and risk us being wrong! Good luck!

mischief If taking the lump sum puts your income about the threshold then you will pay tax on it. I haven't checked but it is around £10,500 a year and unlikey to go up.

So if you add up your pension and the lump sum and it is higher than this you will pay tax on everything over that amount.

It is simply that the lump sum is taxable at whatever rate you pay tax so if your total income for the tax year is less than the threshold you won't pay tax, if it is more you will.

I think what follows largely agrees with Alison.

The income tax Personal Allowance for people between 65-74 for 2012-13 is £10,500; and for people under 65, it is £8,105. The Lump Sum, like the pension, is taxable but, if your total taxable income is under your Personal Allowance in any year, you won't pay tax. I understand that you can claim your pension in one year and your Lump Sum in the next which might make sense if your Personal Allowance was higher in the second year and therefore available to save you some tax. If not, I personally would claim pension and lump sum [if that's the option you take] in the same year. Why wait?

I deferred by 2 years as I was earning just over the 40% level at 60/61as acting head of department, but when I claimed it back I took it as a lump sum (taxed at the current rate, which by then was back to standard basic as I had reverted to second-in-department) and had a new patio laid and the garden landscaped, something I have never regretted as we enjoy it and it would have undoubtedly have been more expensive if we had waited. It was an investment as it will have added a bit to the house, but more importantly to our enjoyment of our house and garden!

OK. I have really been reading the State Pension Deferral Guide (boring) suggested by Frankel and have found the following.

1. The lump sum payment is NOT added to your income when working out tax, it is done in a different way. The tax you pay on your lump sum will usually depend on the tax rate that applies to your other income in the tax year that you start claiming your State Pension.

2. You can ask us to delay paying you your lump sum until the tax year after the tax year in which your State Pension claim starts. You may want to do this if you think you would have to pay tax on your other income at a lower rate in the tax year after you start claiming your State Pension.

I have sent an email to the Pensions Advisory Service asking for more clarity and will let you all know the result.

It may not work out but it's worth asking the question.

Where's the Neurofen?

Reading Page 24 of the dreaded document www.direct.gov.uk/prod_consum_dg/groups/dg_digitalassets/@dg/@en/@over50/documents/digitalasset/dg_200597.pdf, it looks as though the Lump Sum is charged for tax at the rate of income tax you pay on your highest rate of income tax before adding the Lump Sum. So, it's either 0%, 20%, 40% or 50%. The Lump Sum does not tip you into a new tax band. The document is dated April 2012 so hopefully it is up-to-date and the Pensions Advisory Service [PAS] will confirm what the document says. I had thought it worked differently. I guess it shows how much one must steel oneself against drowsiness, read all the documents and keep up to date. I hope the PAS is helpful and says what you want to hear.

I have had an answer at last from the Pension Advisory Service. It isn't a complete answer, and they advise me to ring and discuss it with an adviser but this is what they say.

"The thing to bear in mind is that if you have a pension and benefits, you could well go above the tax threshold. Although the State Pension is not taxed directly, it does form part of your income and would be assessed accordingly. You would not receive any extra interest payments for for any period that payment is delayed."

So it is clear that athough I can delay the lump sum for up to a year, I have realised that I wouldn't be able to live on my state pension alone so I would have to rely on benefits to increase my income until I take the lump sum. As the PAS say, this may take me over the tax threshold and my lump sum would still be liable to tax. Catch 22.

Should have known it's impossible to outwit the taxman. I will ring them and discuss it and if I have anything to add you will hear from me again. Thanks to all who participated in this thread.

Hi all - i deffered my state pension when i was 60 in march 2010 and carried on working full time - i am now wanting to reduce my hours to partime ie 2 or 3 days per week and claim my pension and the lump sum due - would i be worse off if and pay more tax if i claim it now or would it be better to wait till my birthday in march next year - 2013 ?
Hope someone can help as i would like to cut down my working hours as soon as possible - but it is all soo confusing
thanks x

www.saga.co.uk/money/pensions-and-savings/should-i-defer-my-pension.aspx

I found this helpful, but still cannot decide what to do, gamble either way I think