Until recently it was possible to defer a State Pension in favour of a lump sum. However from 6 April 2016 this option is no longer possible, although the pension can be deferred in exchange of an increased regular State Pension at a later date.
If you chose to defer an ‘old’ State Pension, and reached retirement age before 6 April 2016, you still have the choice of receiving a lump sum plus an indexed regular pension or an increased regular pension.
It is also useful to know that if you receive a lump sum and other income your lump sum will not attract combined taxation. In other words, if your standard income (excluding the lump sum) means you are a basic rate taxpayer, you will still be taxed at the same rate (20%) on the whole of the lump sum – even if it nudges you into the higher rate band.
With this in mind, it is important to establish in which tax year the lump sum is chargeable. A lump sum is taxable in the year in which you are entitled to it (when the lump sum option is chosen on ceasing to defer). This is irrespective of when it is paid so if, for example, you stopped deferring and chose a lump sum on 1 April but the funds were not actually paid until early in the new tax year, the tax point remains as 1 April.
If you would like to receive pension planning advice or more information about the changes to lump sum payments, please do not hesitate to contact our team of experts.