Can I defer payment of the lump sum when I take my state pension?

10 December 2013

Q

I'm a higher-rate taxpayer building up a lump sum payment from the state pension. Am I able, when I retire, to take the state pension and defer payment of the lump sum? Will I then be liable to 40% tax on this amount?
From
PW/Wrexham

A

Unless you have a significant need for additional capital, I would advise that you consider the pension option over the payment of a lump sum.Whichever benefit you select, the state pension will be considered as taxable income and form the first part of your income when calculating any liability to tax.

The value of your personal allowance is offset against the state pension and for most people this enables the benefit to be paid without tax. Should your total retirement income exceed the basic-rate band, only that which falls into the higher-rate band will be subject to tax at 40%.

In order to reduce your income for tax purposes, you could either consider making a regular gift to charity or even fund a pension, where contributions of up to £3,600 gross can be made each year. To reduce the risk of your savings being taxed, it makes sense to make use of your Isa allowance each year, where you can shelter up to £11,520 of capital from personal taxation.

By using this allowance on an annual basis, a substantial level of wealth can be sheltered from tax over a relatively short period of time.

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Can I defer my state pension?

Anyone reaching state retirement age has the option to defer payment of a state pension. This option is well worth considering for anyone who can afford to do so. For every year you defer, the state pension increases by approximately 10%. This is a significant, risk-free investment return and will add substantial value to the pension if deferred for a number of years.

You then have the option of either receiving a lump sum payment equal to the income plus growth that has built up, or an increase to the regular pension that you receive for the rest of your life. For most people, receiving the higher pension is the best option as the income is indexed against inflation.

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