The Lemon Fool

Have deferred my state pension for about 6 years but with the era of zero rates behind us for at least the time being have decided to claim my pension.However it occurs to me that as l am close to my LTA,with 4 years still to go, does the extra income or nominal capital amount count against my LTA.

Thanks

The state pension doesn't count towards the LTA. It is entirely separate.

You may need to pay taxes on additional pension income that you receive if you exceed your annual Personal Allowance. If the amount you receive in income from your state pension (including additional pension payments from deferred pension claims), private pensions or company pensions, taxable benefits, or any other income such as employment wages, properties or investments is more than £12,570. If you have multiple private or company pensions, you may want to consider a pension transfer to keep everything in one place, so it’s easier to keep track of. You will also have to pay tax charge on pension payments if the total worth of your state and private pensions exceeds your pension lifetime allowance, £1,073,100.

The last line of this paragraph was the reason for my question

Thanks for your reply

samenic wrote:You may need to pay taxes on additional pension income that you receive if you exceed your annual Personal Allowance. If the amount you receive in income from your state pension (including additional pension payments from deferred pension claims), private pensions or company pensions, taxable benefits, or any other income such as employment wages, properties or investments is more than £12,570. If you have multiple private or company pensions, you may want to consider a pension transfer to keep everything in one place, so it’s easier to keep track of. You will also have to pay tax charge on pension payments if the total worth of your state and private pensions exceeds your pension lifetime allowance, £1,073,100.

The last line of this paragraph was the reason for my question

Thanks for your reply

Where does this paragraph come from ?

EdIt - Found it https://blog.moneyfarm.com/en/pensions/ ... e-pension/

So I had a quick chat with the very friendly "Anna" at Moneyfarm to check their story. (Great customer service BTW)
As a result they will update their website to remove this error.

========================================================================================
Anna
- 14:13
Hello, how may I assist you?
You
- 14:16
Hi
You state that "You will also have to pay tax charge on pension payments if the total worth of your state and private pensions exceeds your pension lifetime allowance, £1,073,100." Can you please explain why you think the state pension is subject to the LTA ? I thought they were unrelated Read
Anna
- 14:18
I will have to double check this for you
You
- 14:18
Please do
Anna
- 14:23
Please bear with me I'm trying to find out for you
You
- 14:23
Thanks
Anna
- 14:27
Can I ask where exactly on our website did you find this?
You
- 14:27
https://blog.moneyfarm.com/en/pensions/ ... e-pension/ "Do I pay tax on deferred Pension?"
Anna
- 14:27
It is excluded
Anna
- Now
Apologies! We will get this corrected if it says otherwise
You
- Now
Many thanks for the clarification.

samenic wrote:You may need to pay taxes on additional pension income that you receive if you exceed your annual Personal Allowance. If the amount you receive in income from your state pension (including additional pension payments from deferred pension claims), private pensions or company pensions, taxable benefits, or any other income such as employment wages, properties or investments is more than £12,570. If you have multiple private or company pensions, you may want to consider a pension transfer to keep everything in one place, so it’s easier to keep track of. You will also have to pay tax charge on pension payments if the total worth of your state and private pensions exceeds your pension lifetime allowance, £1,073,100.

The last line of this paragraph was the reason for my question

Thanks for your reply

Having more than one source of retirement income is not necessarily a problem tax-wise. I have 3 sources, the state pension, an occupational pension and an annuity. The state pension is paid without tax being deducted. The occupational pension has a tax code which reflects the amount of the state pension. The income from the annuity has a tax code of BR, which means that all income is taxed at the basic rate. If it was going to run into higher rate tax, there are other tax codes which reflect that.

There is no need to have it all in one place.

TJH

Thank you for your kind help.Much appreciated.

Firstly, the state pension is just considered as income, it doesn't affect the LTA on private pensions as noted above.

Secondly, it's generally isn't considered financially optimal to defer the SP. The uplift is by a linear rather than compounded amount, and you are almost certainly better off taking it and investing it yourself if you don't need it. Even if you take it a cash and don't invest it it takes about 17 years for it to become worthwhile. Worst case scenario you die before you even begin drawing your SP.

I don’t wish to hijack the thread but the analysis of whether or not to defer is very dependent on whether you were able to get the 10.4%, your life expectancy, government policy regarding inflation related increases (triple lock) and the actual rate of inflation. Professor John Kay did some work on this (a bit dated now). In a low inflation environment (where we are making real returns) life expectancy dominates; in a high inflation environment (assuming the SP is indexed) negative real returns are the issue.

Best wishes,

Steve

The point of deferring the state pension isn't to maximise your returns but as insurance against living too long by giving you additional inflation proof income for life. Yes due to the linear nature of the calculation the benefit of doing so diminishes each year you do it, but for the first couple of years at least it's a very good deal.

The effective 5.8% annuity rate in the first year is better than you'd get from any insurer.

Smoggy wrote:The point of deferring the state pension isn't to maximise your returns but as insurance against living too long by giving you additional inflation proof income for life. Yes due to the linear nature of the calculation the benefit of doing so diminishes each year you do it, but for the first couple of years at least it's a very good deal.

The effective 5.8% annuity rate in the first year is better than you'd get from any insurer.

Unfortunately in practice it is impossible to defer the state pension once it is in payment. I have tried recently and it cannot be done despite DWP claims that it can. It is a scandal.

Smoggy wrote:The point of deferring the state pension isn't to maximise your returns but as insurance against living too long by giving you additional inflation proof income for life. Yes due to the linear nature of the calculation the benefit of doing so diminishes each year you do it, but for the first couple of years at least it's a very good deal.

The effective 5.8% annuity rate in the first year is better than you'd get from any insurer.

Yes indeed. I viewed my deferral (10.4%) as buying an inflation proofed annuity - insurance against two things: excessive longevity and/or high inflation. The risk, of course, is changes to government policies but the grey vote counts!

My aim was never to maximise the amount received but rather to buy insurance against certain possibilities.

Best wishes,

Steve

Steveam wrote:

Smoggy wrote:The point of deferring the state pension isn't to maximise your returns but as insurance against living too long by giving you additional inflation proof income for life. Yes due to the linear nature of the calculation the benefit of doing so diminishes each year you do it, but for the first couple of years at least it's a very good deal.

The effective 5.8% annuity rate in the first year is better than you'd get from any insurer.

Yes indeed. I viewed my deferral (10.4%) as buying an inflation proofed annuity - insurance against two things: excessive longevity and/or high inflation. The risk, of course, is changes to government policies but the grey vote counts!

My aim was never to maximise the amount received but rather to buy insurance against certain possibilities.

Best wishes,

Steve

I completely agree. Sorry my post was more aimed at vand who'd stated that deferring was generally not financially optimal. I just wanted to point out that there's wasn't necessarily a consensus view and there were benefits to many to deferring for at least a couple of years.

Smoggy wrote:The point of deferring the state pension isn't to maximise your returns but as insurance against living too long by giving you additional inflation proof income for life. Yes due to the linear nature of the calculation the benefit of doing so diminishes each year you do it, but for the first couple of years at least it's a very good deal.

The effective 5.8% annuity rate in the first year is better than you'd get from any insurer.

Sorry but I would debate this.

The main group who can afford to defer pensions are those who are well off and with enough income that they don't immediately need the SP. For this group it IS about maximizing returns, and your general range of outcomes rather than protecting against tail risk of running out of money. In any case I would argue that the small uplift from deferring SP is not going to move the needle in terms of comfort in latter life.

Yes it's at the margins but IF one can afford to defer state pension then I believe it to be prudent. Investments have had an excellent run in the last decade but this year has surely shown the merits of buying some additional inflation linked guaranteed income as a bit of a diversifier if nothing else. The fact that some people see the 4% rule as optimistic these days shows the value of a 5.8% guaranteed income.

But as with all insurance/investment decisions it's going to come down to one's personal risk appetite (and which risks they see as most critical).

Steveam wrote:

Smoggy wrote:The point of deferring the state pension isn't to maximise your returns but as insurance against living too long by giving you additional inflation proof income for life. Yes due to the linear nature of the calculation the benefit of doing so diminishes each year you do it, but for the first couple of years at least it's a very good deal.

The effective 5.8% annuity rate in the first year is better than you'd get from any insurer.

Yes indeed. I viewed my deferral (10.4%) as buying an inflation proofed annuity - insurance against two things: excessive longevity and/or high inflation. The risk, of course, is changes to government policies but the grey vote counts!

My aim was never to maximise the amount received but rather to buy insurance against certain possibilities.

Best wishes,

Steve

- The state pension is already inflation proofed - deferring it doesn't make any difference to that particular aspect.

- Again, I repeat that if you already have enough income at 65 that you don't need the state pension, then you don't need to defer it. Let's say you have a 500k pot and use the standard 4% rule to fund a £20k/yr retirement -- you can effectively cut that down to a 2% withdrawal rate by taking the SP. 2% is already much lower than any perpetual withdrawal rate that has ever been backtested. You will not run out of money. In a world where a 2% withdrawal rate isn't safe then the likelihood is more that the SP will be scrapped before you run out of private money. If you don't take it then all you are doing is placing a higher withdrawal rate on your pot in the earlier years and exposing yourself to increased sequence of return risk.

Instead of lowering your risk of running out of money in the long term, by delaying the state pension the opposite is more likely.