25 Mar 2018

Risks in deferring the former state pension

14 March 2018

Pension trap


  • Pre-6 April 2016 deferred state pensions can be claimed as a lump sum.
  • The lump sum is taxed at a flat rate depending on other taxable income.
  • If the deferrer dies leaving no spouse or civil partner, unclaimed lump sums are lost.

Until 5 April 2016, individuals could defer claiming the state pension and later take the amount of pension that had been deferred as a lump sum, as long as the deferral was for at least 12 months. Alternatively, they could claim a higher regular state pension.

Since then those reaching state pension age from 6 April 2016 have still been able to defer claiming, but they are not eligible for a lump sum. The only option is to claim a higher regular state pension, although the increase is considerably lower than it was under the previous system.

The former state pension also included provision for a surviving spouse or civil partner on the death of the claimant, whereas (subject to some transitional provisions) the new arrangement is predicated on individuals building up their own discrete entitlement.

What, though, happens to state pensions deferred under the previous system on the death of the deferrer?


Tax on lump sums

It is helpful to recap how state pension lump sums are taxed.

Under F(No 2)A 2005, s 7 to s 9 the lump sum is charged to income tax at the top rate that the individual otherwise pays on their step 3 income, as determined by ITA 2007, s 23. This is applied at a flat rate: the lump ...

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