EIM74650 – Social security pension lump sum
Sections 7-10 Finance (No.2) Act 2005
Background
For many years, anyone meeting the requirements for receiving
the state pension (that is, having reached the state pension age
and having a sufficient National Insurance Contributions record)
has been able to defer receipt of the state pension by not
submitting a claim for payment of the pension. Anyone deferring
their pension is compensated for the amount foregone by receiving
enhanced weekly pension payments once a claim for payment takes
effect.
However, the rules changed with effect from 6 April 2005 as
part of the Government’s policy of encouraging flexible
retirement.
Anyone already deferring their claim at 5 April 2005 or
beginning a period of deferral after that date can choose to defer
for as long as they wish. Where the period of deferral from 6 April
2005 (or, if later, the date on which deferral began) extends for
less than 12 months, then the pensioner will receive an enhanced
weekly payment of state pension. The rate of enhancement in respect
of the state pension foregone from 6 April 2005 is greater than the
rate previously applied but otherwise there is little changed from
the previous position. The weekly payments of state pension are
chargeable to tax as pension income under Part 9 Chapter 5 ITEPA
2003 (see EIM74600).
In contrast, where a person defers for a period of more than
12 months beginning on or after 6 April 2005, then in respect of
the amount foregone after 6 April 2005 the pensioner can choose to
receive either
- an increased weekly amount of state pension, or
- a one-off lump sum, and the weekly state pension paid at the standard rate (or possibly an enhanced rate if the period of deferral began before 6 April 2005, in which case the weekly state pension will be enhanced as compensation for the amount foregone during the period of deferral up to 5 April 2005).
There is no change to the way in which the weekly state pension
is charged to tax.
However, new legislation at sections 7-10 Finance (No.2) Act
2005 ensures that the state pension lump sum payment is chargeable
to income tax. Because each lump sum payment will be a significant
amount, the legislation provides for the lump sum to be taxed in a
different way to the weekly state pension (see
EIM74651).
As there must be a minimum 12-month deferral period following
6 April 2005 before a state pension lump sum can be claimed, the
earliest date that a payment might be received falls in the tax
year 2006/07.
Social security pension lump sum
The legislation uses the term “social security pension lump sum”. Section 9(1) Finance (No.2) Act 2005 explains that “social security pension lump sum” means
(a) a state pension lump sum,
(b) a shared additional pension lump sum, or
(c) a graduated retirement benefit lump sum.
Most social security pension lump sum payments are expected to be in respect of a state pension lump sum. For convenience, therefore, this guidance uses the term “state pension lump sum” but this should be read as including a shared additional pension lump sum and a graduated retirement benefit lump sum.
