Social security pension lump sum: making the choice
Lump sum or enhanced pension
When a person notifies the Department for Work and Pensions (DWP) of an intention to claim or recommence a claim for the state pension following a period of deferral that has continued for more than 12 months, the DWP will provide details of the potential pension entitlement. This will include a comparison between the amount the person will receive if that person chooses the enhanced weekly state pension and the amount payable as a lump sum together with the weekly state pension paid at the standard rate.
Once the claim for the state pension takes effect, the person has a limited time (prescribed by the DWP) to choose between the enhanced weekly state pension and the lump sum. If the person does not notify the DWP of their choice within that time, the person will be paid the lump sum.
Later year election
When a person chooses to receive the state pension lump sum, then that person may elect to receive the lump sum payment in the tax year immediately following the tax year in which the claim for payment of the weekly state pension takes effect. Once again, the person has a limited time (prescribed by the DWP) to make the election. This will affect the tax year for which the state pension lump sum is assessable (see EIM74653).
Where an election is made, the earliest date that DWP may make payment of the lump sum will be 6 April of the later tax year. Nevertheless, a person might choose the later year if they anticipate that their marginal rate (see EIM74652) in the year in which the claim for payment of the weekly state pension takes effect will be greater than it will be in the following year.
For example, the person may have deferred claiming the state pension whilst working beyond the state pension age. Consequently, the level of income in the tax year in which they retire and claim the weekly state pension might be greater than that for the following year. In that instance, it might be advantageous to receive payment of the state pension lump sum in the year following the year of retirement.
Requests for advice
You may receive requests from pensioners for assistance in working out their likely marginal rate, in order to help them to make this decision.
When you give advice about the marginal rate, you must stress that
- you can only provide assistance on the basis of the information given to you
- that any guidance you can give will only be provisional
- the actual amount of income received in a year – and the rate at which that income is taxable – cannot be finalised until after the end of the tax year.
You must take care
- not to advise taxpayers specifically in which year they should claim the lump sum payment, and
- restrict your advice to helping to calculate the marginal rate of tax.