State pension lump sums

Since April 2005 it has been possible to defer the state pension, not just for an added weekly amount (‘increment’) when eventually drawn, but to get a lump sum, taxable in full, instead.

The lump sum option requires a minimum deferral of 12 months, therefore the first lump sums became payable in April 2006.

The taxation of these sums is unusual. The whole amount, which could after a few more years amount to £10,000 or more, is taxable only at the recipient’s existing highest rate of tax. This applies even if the extra amount would have pushed the taxpayer into a higher tax bracket if it were any other type of income.

In addition, it is possible to stop the pension deferral and take a weekly state pension, but leave payment of the lump sum until the start of the next tax year so that it is taxed in that later year. This provides some flexibility where a pensioner continues to work for a while and is a higher rate tax payer but whose income then drops significantly at a later stage and they become a basic rate tax payer. If you or perhaps your parents are approaching pension age, proper consideration of both the state pension rules and the system of taxation will be worthwhile.