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The Rules on State Pension Lump Sum Payments

Andrew Stephenson Pension Expert

By Andrew Stephenson.

Independent Financial Advisor

More Reading on Pension Drawdown...

Recent changes to pension rules will change the way people receive a state pension lump sum via deferral, beginning in 2016. Those who reach retirement age prior to that point will operate under the old rules. Although we will deal with both the old and new rules in this article, many of the details surrounding the new rules have not yet been settled. More information on those details will be made available during 2015.

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"Can I take my pension as a lump sum?” If this is a question you have been asking yourself, the answer is easy for private pensions: yes, you can. It is not so simple for the state pension.

Pension Differences

Understanding the difference in lump-sum payments between private and state pensions begins by understanding the differences between the two kinds of pensions themselves. A private pension is one that is established by you, an employer, or another third party on your behalf. You contribute to the pension plan, usually by way of deductions from your salary. Your employer may also contribute as well.

As money is added to your pension pot, the value of the pot grows proportionally. The money you have saved is invested by your pension administrator as a means of helping you earn a return on what you have saved. By the time you are ready to retire, you have a pot of money sitting there waiting for you. The state pension is different.

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You still contribute to your state pension through regular National Insurance payments deducted from your salary. However, that money is not set aside in a pot as it is in a private pension. Instead, it is used by the Government to help make the payouts owed to current pensioners. When you retire, there is no pot for you to access. Instead, you will begin receiving monthly payments funded by the contributions of younger workers. This fundamental difference is the reason behind the pension lump sum payment from a state pension being the result of pension deferral rather than a pot withdrawal.

General Overview

It should be obvious from our description of the state pension that you cannot simply request an entire lump-sum payment from the Government when you reach retirement age. Any lump sum you will receive is based on deferring your pension payments from the date you retire. What does it mean to defer your pension? It means to delay receiving payments once you reach retirement age.

Retirement age is currently 65 for men and 60 for women. Both ages will be gradually increased through until 2030, eventually topping out at 68. Regardless of when a person reaches retirement age, deferring a pension works the same way. In fact, pension deferral kicks in automatically unless you inform the Government that you are ready to start receiving state pension benefits.

Anyone who reaches retirement age prior to April 6, 2016 operates under the old rules. For now, Northern Ireland has not approved the pension rule changes adopted by Great Britain; it will continue operating under the old rules until such time as their Assembly officially adopts the changes. Those rules stipulate the following:

  • Deferral Length – In order to receive a state pension lump sum, an individual must defer pension payments for minimum of five months. Payments can be deferred indefinitely, allowing the pensioner to collect more when payments eventually do begin. Any payments due a pensioner can be left to survivors in the event of the individual's death.
  • Lump Sum Calculations – Deferring pension payments enables pensioners to actually earn a little bit more. For every five weeks payments are delayed, the lump sum amount will be increased by 1%. An increase of 10.4% is applied for every 12 consecutive months of payment deferral.

Individuals reaching retirement age on or after April 6, 2016 will be subject to the new state pension rules announced in spring of 2014. The new rules also allow for a state pension lump sum based on deferring one's pension at retirement age. In addition, although pensioners will still be able to earn more by deferring, how much more is not yet known. Those calculations will not be made until 2015.

In addition, the Government has introduced something it calls the 'new state pension'. This new pension is simply an additional amount of money eligible pensioners will receive alongside the basic state pension. There are certain qualifications individuals must meet in order to be eligible for new state pension funds.

There is one added benefit to the rule changes but not a lot of people know about. It has to do with continuing to work after reaching retirement age. The new rules now stipulate that you can choose to continue working without having to keep paying into the National Insurance programme. As small as it may be, that extra amount in your weekly pay will most certainly be helpful.

Special State Pension Rules

Any plans you might have to defer your state pension payments in order to receive a lump sum later on may be affected by a small handful of special rules. These rules are part of the changes set to take effect in 2016. These are as follows:

  • Extra State Pension – If you claim the extra state pension under the new rules, any monies you receive will be counted as regular income. That income will affect the pension credit, housing credit, council tax reduction, and other tax credits.
  • Receiving Other Benefits – Pensioners receiving any of a long list of other government benefits will not build up any extra state pension funds or lump-sum payments for the days they are receiving such benefits. Examples of these benefits include, but are not limited to, income support, pension credit, incapacity benefit, severe disablement allowance, and widower's pension.
  • Partner Benefits – Your extra state pension and lump-sum payments are also negatively affected if your partner is receiving certain benefits such as income support, pension credit, employment support, job seekers allowance, or the universal credit.
  • Automatic Payments – Eligible pensioners already receiving most of the benefits previously listed will automatically begin receiving their extra state pension payments upon retirement. Deferring those payments requires the pensioner to contact the Government and request deferral.

Get Good Advice

Pension reform is intended to make the pension system easier to participate in and more fair for everyone involved. Nonetheless, as with any other large-scale change, adapting to the new way of thinking takes some time and patience. You may be in such a position if you find all of the new rule changes confusing. There is no need to panic. Instead, get some good advice by way of a certified financial planner.

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You can take a state pension lump sum payment by deferring your regular monthly payments for at least five weeks. Deferring enables you to earn more, making it a very good option if you can afford to do so. It is just one of many choices now available to you thanks to pension reform.

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