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I have this scenario and I am having problems understanding how this scenario fits into the upcoming pension laws (mentioned in the latest budget).

A man who is 66 now and 67 on the 8.11.14 has deferred his state pension.

He earns PAYE £31,398 this year to April 2014.

He receives a private annuity worth £2,007 pa.

His weekly state pension has been given at £162.80.

Should he claim his state pension and the lump sum deferred amount now or should he wait until his is thinking of retiring and claim his lump sum in the following tax year?

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According to this page, any deferred lump sum amount is fully taxable, so he should aim to minimise the marginal tax bracket it will fall into. With PAYE of £31.4K and the annuity of £2k, and a higher-rate tax threshold of £9.4K+£32K = £41.4K for 2013-2014, that leaves about £8K to play with in the 20% band for 2013-2014.

If he's got about 16 months worth of deferred pension (state pension age of 65) then that would be £10-11K so he'd end up paying a bit of 40% tax.

For future years after retirement the income would be roughly £2K+£8K which pushes him into or very close to the 20% band given the personal allowance will be £10K or £10.5K. So it'll be hard to avoid paying 20% tax but 40% should be easy to avoid.

Alternatively if the lump sum is not needed, opt for the enhanced pension - you get a 1% uplift for every 5 weeks of deferral and given the likely trajectory of the personal allowance etc the extra would probably escape going above it.

I don't think the pension changes in the recent Budget (March 2014) make any difference to any of this as his private annuity is apparently already in payment. I haven't heard any suggestion that the lump sum for deferring the state pension can be treated as part of a normal private pension pot.

  • Thanks, that does pretty much follow what I thought on the subject too :) – Sammaye Mar 28 '14 at 9:18

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