How taking a pension lump sum could save you money

24th February 2020

 

If you reached state pension age after 6 April 2016 and deferred taking your pension, you will receive a higher weekly amount when you start receiving it.

However, if you reached state pension age before 6 April 2016 there is a second option, which is to receive a state pension lump sum rather than the additional weekly payments.

How is the lump sum taxed?

Barry (72) reached state pension age a few years ago and therefore could have started to receive his pension before 6 April 2016.   However, as he was in business at the time he decided to defer it.

Barry started to receive his state pension in 2018/19 and chose to receive a lump sum, which was £30,000.

In example 1 Barry was a higher rate taxpayer before considering the state pension lump sum, therefore 40% tax was payable – £12,000 in total.

In example 2, Barry received a smaller dividend from his company. His total income is less than the basic rate limit, so you may expect 20% tax to be payable on a proportion of the lump sum, with the remainder being taxed at 40%.  However, this is not the case. Due to the way this piece of legislation works, 20% tax would in fact be payable on the entirety.

In summary, take your state pension lump sum in a tax year where your other income is lower, if at all possible.  If Barry had spoken to his adviser before taking the lump sum, it may have been possible to save £6,000 in tax.

Pension contributions and gift aid donations can be used to reduce the tax to a lower rate.  It is also possible to carry back gift aid donations made after the end of the tax year in question (as long as the donations are made before your tax return for that year is submitted to HMRC) giving even more options to reduce the tax.

Further detail can be found here: https://www.gov.uk/deferring-state-pension/what-you-get. If you are looking to take a state pension lump sum, please speak to your usual Whiting and Partners contact for advice before doing so – it could save you thousands!



 
Other items in Blogs
 
Ian Piper
15th April 2021 2021 SME Growth: Revenge Spending?

As we pass the Covid-19’s first anniversary of its impact on our area’s economy, accounts of local SME’s are now starting to show part of the damage they have experienced through the lock-downs and associated restrictive measures. Thankfully, through Government financial help and the nimble footwork of businesses adapting to survive, the overall effect upon…

Read More »

Jaimie King
15th April 2021 Life after CBILS: The Recovery Loan Scheme

The government-backed Coronavirus Business Interruption Loan Scheme closed on 31st March to new applicants. Thankfully, the government has put in place further support for businesses, to follow this.   The Recovery Loan Scheme – Government backed loans, 3 months – up to 6 years depending on the product – Up to £10m, no cap on…

Read More »

Vanessa Pearson
26th March 2021 6 April: A Guide to Off-Payroll Working Tax Rules

The proposed new rules apply regarding who determines IR35 status for freelancers hired by medium and large companies are imminent. Our Brief Guide will help find out how this affects you and what you can do: A Brief Guide to Off-Payroll Working Blog entry by: Vanessa Pearson

Read More »

Ben Kilby
25th March 2021 I hear a rumour…

I hear a rumour that Lloyds Agricultural banking team based in Edinburgh has been disbanded and merged within other teams around the country. Although some within the new regional teams may have some knowledge of agriculture it has been suggested that customers felt that this was not important. It seems that the agricultural specialism within…

Read More »

Fiona Mann
24th March 2021 Making Tax Digital – the next steps

Our MTD Group have produced Issue 5 of their newsletter giving details of Making Tax Digital (MTD) as it continues.   So if you are unsure of what to do next, our newsletter has information and advice how to proceed.  Don’t delay however as penalties will be introduced if submission deadlines are missed.   W&P_MTD5…

Read More »

Amanda Newman
18th March 2021 Holding residential lettings in a company

There has been an ongoing debate since the government started to reduce tax relief available on mortgage interest that having property in a company could be more beneficial.   In order to transfer the property from personal ownership there could be a CGT charge depending on the difference in value from when you bought it…

Read More »