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Effect on personal allowance of opting for pension lump sum after retirement.
Our client has deferred taking her state pension for several years and now has the option of a substantial sum of about £35 000 or an enhanced pension of about £74 a week.
Finance (No 2) Act 2005 s 7 covers the tax position of the lump sum. Section 7(5) indicates the rate at which the lump sum should be taxed – by virtue of ‘Step 3 income’. Section s 7(9) then indicates how ‘Step 3 income’ is to be calculated – by reference to the calculation in ITA 2007 s 23.
Our client’s annual income comprises a small occupational pension (£3 000) dividends (£400) and interest (£8 500). Her ongoing National Insurance state pension will be £3 900 a year.
Her income exceeds her personal allowance but her marginal rate seems to be nil because of the dividend allowance and 0% starting rate for savings. Our questions are...
