If you put off claiming your State Pension for at least one year without a break, you can choose to take this at a later date in the form of a lump sum.
This means that you will get a one-off payment based on the amount of State Pension you would have received if you had been claiming it, you will also receive interest on this amount which will be around 2% above the Bank of England ‘base rate’.
You will start to receive your State Pension at the normal rate when you claim your lump sum which you may have to pay Income Tax on, however, this depends on any other income you may have and if you are making a new claim to Pension Credit or Housing Benefit, it will not be taken into account when working out your entitlement for these benefits.
What tax do I pay on my state pension lump sum?
- Putting it simply, the rate of tax that will be levied against your lump sum is the highest rate that applies to your other income for that tax year. This means that:
if you are not liable to pay any tax for that tax year on other income, no tax should be deducted from the deferred lump sum, if it has been taxed before receipt it can claim it back.
Or, you will pay tax at one of the following rates:- 20% – if you are liable to tax but your taxable income does not exceed the basic rate limit (up to £31,785 for 2015/16);
- 40% – if your taxable income exceeds the basic rate limit but does not exceed the additional rate limit of £150,000 (this is called the ‘higher rate’);
- 45% – if your taxable income is over £150,000.
For Illustration purposes
Joe Bloggs deferred his pension from September 2013 and drew it as a lump sum in September 2014 at which point he also started to receive his normal 4 weekly state pension from September 2014.
When he drew the lump sum he had to elect which rate of tax he fell into, which he believed to be 20% (basic rate). The lump sum of £7,412.79 suffered tax of £1.482.40. Mr Bloggs received net lump sum pension of £5,930.39. (subject to be declared in the 2014 – 2015 tax year).
Mr Bloggs earned income of £6,937 for the 2014 – 2015 tax year this included his normal state pension of £4,006.24. His total income fell below the tax free allowance of £10,000, which meant his income was not subject to tax making his rate of tax nil, and he was then able to claim back the whole of the tax of £1,482.40 he had suffered on his state pension lump sum.
Please note: if his income had gone over the tax free allowance, i.e. £10,001 he would not have been able to claim any of that tax back.
WatkinsonBlack are pleased to inform on these, and other matters. They have considerable experience in all areas of taxation and business services, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform and that you should always obtain professional advice before taking any action.
Published in Village Life Magazine on 29th January 2016.