Case Study: State Pension Planning

Paraplanner Grant provides us with a great case study on a clients retirement income strategy using the state pension…


Client is 68 year old and he has been working full time as a higher rate taxpayer until September 2015. He has approximately £128,000 in cash reserves which since full and immediate retirement in September, he has been using to meet normal expenses.

Retirement assets consist of a fully crystallised pension valued at £470,000 and an onshore bond valued at £288,000, which commenced with an investment of £300,000 in June 2015, with no withdrawals taken since.

Having continued to work full time beyond his state pension age, he chose to defer the state pension. He now wishes instead of increasing the state pension payment to take this deferred income as a lump sum, which is permitted for those that reached state pension age before 6th April 2016. The lump sum will be used for discretionary spending purposes and will therefore not be considered as part of his immediate income requirements.

The ultimate retirement income goal is £3,000 net per month.


To meet the income objective from his assets and enable payment of the state pension lump sum in the most tax efficient manner, the structure can be as follows:

As the client is a higher rate taxpayer, in respect of his time employed from March 2015 to September 2015, it would be more efficient to continue to use cash deposits to fund needs until the new tax year starting April 6th 2016.
From here, the first thing to do is use the personal allowance available to him which for 2016/17 is £11,000.

The commencement of his deferred state pension provides £115 per week or approximately £5,980 of taxable income leaving just over £5,000 available within the allowance. We can instruct the crystallised personal pension to provide drawdown income payments totaling £5,000 per annum in the first year.
This provides just under £11,000 in taxable income keeping the client within the nil rate tax band.

He is still £25,000 per annum short of his retirement income target so we can look to the bond to assist with this.

The original bond investment of £300,000 means a tax deferred annual withdrawal of 5% would provide £15,000 per annum. As the client started the bond in June and has not taken any withdrawals since, he has some cumulative allowance left, which will be worth a whole year, 5% , by June 2016. Anticipating this, we can take an extra £10,000 over the year from the bond which keeps within the cumulative withdrawal allowance and provides the full £25,000 in addition to taxable income needed to meet his target of £36,000 per annum net.

The state pension he had deferred but now wishes to take as a lump sum can be paid to him immediately following the start of the 2016/17 tax year. The value of this is circa. £19,500 and the way this is taxed is the amount is charged at the marginal income tax rate the lump sum starts in rather than what bracket it would end up in.

The practical effect of this is that the marginal tax rate applied prior to when the lump is received is the tax rate applicable even if the value of the lump sum would take an individual into a higher bracket.

In this scenario, by keeping the taxable income element of retirement income for 2016/17 to below the personal allowance, the state pension lump sum can be paid and be applied to the nil rate tax bracket. This represents a tax saving of almost £4,000, compared to paying tax at basic rate, which is achieved by firstly deferring the lump sum until the 2016/17 year and then planning the way in which income needs are met in this year.

In future years, the income requirement can be achieved through maximum bond withdrawals with drawdown pension income meeting the remainder of the need.

State pension lump sum

Although the 6th April 2016 represents a change in the state pension and the abolition of the ability to defer the pension in exchange for a lump sum, individuals who reached SPA prior to this date could still defer and later take a lump sum. In addition, those already in receipt of the state pension could stop taking income and defer the pension in exchange for a future lump sum (this can only be done once.)

This means that while the rules are changing for new retirees, it is possible quite a significant number of individuals will have deferred or choose to defer their state pension in the coming years meaning awareness of the this lump sum taxation quirk can provide excellent tax planning potential.

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