Deferring Pension.

[furrypusscat]

I could have taken my state pension 3 years ago but decided to defer it. I have now made the decision to start taking my pension and now have a net amount of just over £17000 if I take as a lump sum or if I wanted it adding to my weekly pension it would be around £44 extra for the rest of my life. What are your views on this, has anyone had to make a similar decision. It is difficult to know the best way forward with interest rates as they are. I am a standard rate tax payer as I have 2 small private pensions.

[BlackadderV]

Be prepared for disappointment! When I claimed my state pension earlier this year I thought I would be £135 a week better off. Not so. My tax bill increased from £20 to £120 per month, I lost my housing and council tax benefit, as a result of which I am about £15 per week better off.

[THECORBYLOON]

When I worked on a section dealing with State Pensions, pensions were increased by 1% for each complete seven-week period but now it's for each five-week period AND there's the option of a lump sum payment including interest 2% above base rate.

It was a lot simpler in my day...

[furrypusscat]

Only just noticed there has been more interest and theories put forward.

The amount of state pension including the extra would be taxable at standard tax rate. I had worked out that it would take almost 10 years to break even and then I would be on the winning side. Basically I would get 10.4% for each year deferred therefore as I have 3 full years it will be 30.12% on top of my pension. I am not and doubt I ever will be entitled to means tested benefits so will not lose out there. Thanks once again for everyone's input.

[THECORBYLOON]

I think you meant 31.2% but you would pay tax on the lump sum or the increased weekly amount. The period is as was said previously, just a few weeks under seven and a half years of the weekly increased amount before you are in credit but that is less than the ten years you estimated it to be. As I said, in my day there was no lump sum but folk would still ask if they would be better deferring and I would always say they would get maybe 7% extra each week but they would have missed out on thousands by not getting a pension for a year.

[furrypusscat]

Thank you corby, sorry I stand corrected, I hadn't got my brain in gear, well it is nearly bedtime.

[SirOracle]

That is a good point raised by Corby.
The lump sum of £17,000 will be subject to tax,and dependent on your other income you may be put into a higher rate which would reduce the £17,000 considerably.
I elected to take the enhanced weekly amount,but to some extent the state of your health should be considered.
In the present climate 5% is almost impossible to achieve with a no risk deposit account....lucky to get half of this.

[Sipowicz]

Furrypusscat has already said even with the lump sum/higher pension, she will still be a basic rate taxpayer.

[SirOracle]

Sipowicz. Where did the OP say that the £17,000 would not be subject to a higher rate of income tax ?

[Sipowicz]

The lump sum is taxable at the highest rate as your other income, furrypusscat has said even with the extra pension she will still be a basic rate taxpayer, therefore the lump sum will be taxed at this rate.
https://www.gov.uk/deferring-state-pension/what-you-may-get

[Sipowicz]

I take it when she says "standard" rate, she means basic rate. I may be wrong, if I am, apologies.

[SirOracle]

Sorry to disagree with you Sipowicz.
If eg the income of the OP is say £25,000 for the tax year,then adding £17,000 to this would bring the income to £42,000.......which is well above the £31,865 and tax at 40% would have to be paid on the amount over £31,000.

We do not know (rightly) what the OP's income is,as it has NOT been stated,here.

[furrypusscat]

Yes I did mean Basic Rate, at present 20%.
SirOracle, sorry you have lost me, if I take the extra amount as pension it will make me an annual amount of £9447.36. Are you mistaking the £17000 as being an annual amount on top of my pension every year. With my other small pensions I will be well under the higher tax rate and as stated will always be taxed at the Basic Rate.

If I was to take the lump sum it would be (£21684.24 gross) just over £17000 net as mentioned in my original post.

[furrypusscat]

Now I think I realise what SirOracle is meaning. If I were to take the lump sum plus my other income, ie state pension plus my other 2 small pensions I would be over the Basic Rate for tax purposes for this tax year. I have written confirmation from the Dept of Works & Pensions that any deferred amount taken as a lump sum will only be taxed at Basic rate even though it will take me over the annual allowed amount for that tax band. I was out shopping earlier when it dawned on me what he/she was meaning. Thank you once again to all who have taken the time to respond.

[boxtops]

furry, I had this decision to make last year, as I had deferred my State pension for 5 years.

What I decided to do (because I didn't need the lump) was to add the extra accumulated to my weekly pension, so I now get a higher weekly State pension. I then had a conversation with my very helpful tax office, since not only do I get occupational pensions too, I am also still working.

What they do is apply all your personal tax allowance to your State pension, so you get that free of tax, same amount every week, but then they adjust the codes for all your other incomes so that they attract tax. This means in effect that most of my non-State income is currently on BR tax, but I keep a close eye on it to make that the taxman and I are singing from the same hymnsheet. Once the baselines are right - it works.

[furrypusscat]

Many thanks boxtops for that useful information. I think I have made my decision and will do the same and take a higher weekly pension. As I said in one of my posts, I am relatively fit apart from osteoarthritis which isn't a life threatening illness so hopefully will be on the winning side.

[boxtops]

Thanks, furry - it's been the right thing to do for me, certainly. You will find that you get some very odd tax codes on your other income but they send very helpful notes with them to explain why, K numbers and L codes and the like, it all sorts out so that the total at the bottom of the page is the correct tax and income. I keep a spreadsheet, to keep on top of it all!

Are you still working? Don't forget that if you are, you no longer have to pay National Insurance contributions, which is another saving.

Also, as you get older you get age-related personal allowances against income, mine is £10500 for this financial year before I pay any tax. http://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/pensioners/reducing-allowances.htm

You do need to keep your wits about you, but it's worth it in the end!

[furrypusscat]

Thanks. I will certainly keep an eye on things, I'm not behind the door when it comes to finances. I don't work now or anticipate doing so in the future. I split my tax coding up between the two small pensions which are purchased annuities so have a tax code to just cover the annual amount for each as the income from them will not change. The remainder of my allowance is against a works pension which does rise each year and it is this that they should take my tax from. (she says hopefully).