Q. I am planning to retire later this year having elected to defer taking my state pension when I was entitled to almost 6 years ago. As a result my state pension when I take it later this year will have increased by just over 60%. I understand that I also have the option to take the pension I would have received over the last 6 years as a lump sum and then just have the normal rate of state pension paid to me. I am tempted just to take the lump sum but are there any drawbacks?
A. Your state pension will have been increased by 1% for every 5 weeks it has been deferred which equates to 10.4% per annum and if you wish you can elect to have this increased pension paid to you for the rest of your life. It will though take quite a few years at the increased rate to recover the pension that you have not taken for the last 6 years.
You are correct in saying that you can take the pension you have not taken over the last 6 years as a lump sum, plus interest of approximately 2% over the Bank of England base rate. I estimate that the lump sum could be in the region of £30,000. This lump sum would be taxable so if you elected to take it in this tax year it would be added to your salary to the date of retirement plus any occupational or personal pensions you may have, your state pension and any other taxable income, for example investment income. In view of the size of the lump sum that you would receive having deferred taking your state pension for 6 years I would expect that you may well end up paying 40% income tax on some of it.
You could though, ask to defer taking the lump sum until the next tax year which may help to reduce your income tax liability as you would no longer have a salary. Alternatively whilst you are still working you could, if you have funds available and you want to take the lump sum in this tax year pay a large pension contribution. This would help to “wash out” at least some of your income tax liability and 25% of any pension contribution that you make is also available as a tax free lump sum. The maximum pension contribution that you can make to qualify for tax relief is 100% of your salary up to a maximum of £40,000, although there are special rules that apply if your salary is above £40,000 and you have not paid the maximum pension contributions permitted in the preceding 3 years.
I recommend that you talk to a Chartered Independent Financial Adviser to explore your options.
Q. I am coming to retirement and am a member of a final salary pension scheme. I have the opportunity to draw a “Full Pension” or a reduced pension with a tax-free lump sum. Whilst I am ok at present, I have had some fairly serious health problems, which I am advised may shorten my life expectancy, so I think I might be better taking the lump sum and reduced pension. The reason I hesitate is, that my wife is some 6 years younger than me and I am concerned that by taking the lump sum her pension will be reduced if I die. Can you help please?
A. The good news is that in the vast majority of cases, the widow’s pension is not affected when you commute some of your final salary pension for a lump sum, it is usually just the member’s pension you would be giving up. You will need to check with the scheme administrators before making any decision though. An alternative you may wish to consider is asking whether the scheme will offer a transfer of benefits elsewhere. This can sometimes give a bigger lump sum, and may open up the possibility of other methods of drawing benefits, such as income drawdown. This could mean that the full fund is available to provide pension to your widow in the event of your death. The availability of a transfer value is at the discretion of the scheme trustees once you are within a year of normal retirement, and whether it is feasible depends on the level of the transfer value and your investment risk profile. This is definitely an area where individual advice is required from a Chartered Financial Planner who specialises in pensions.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
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