The email was headed ‘Deferring the state pension’ and began “Dear Paul, I looked into this and am very confused.”
The sender was one of many who have written to me puzzled about the rules for deferring your state pension and if it is a good idea. Now, help is at hand.
How to defer your pension to boost it
More than a million people over pension age are still working. And some of them are not claiming their state pension. In the jargon they are ‘deferring’ it – postponing the day they claim it.
Nowadays that is not as worthwhile as it used to be. Men born April 6, 1951 or later and women born April 6, 1953 or later get the new state pension which began on 6 April 2016.
Men and women born before those dates come under the old rules which were much more generous and which are explained later.
Are you one of the women disadvantaged by the changes to state pension age?
The new rules of deferring your pension
If you reach pension age from April 6, 2016 and don’t claim your pension, then when you finally do claim it the amount you get will be increased.
How do I defer my pension?
You do not have to do anything special to defer, just not claim your pension.
An extra 1% is added to your pension for each nine weeks you defer. So each year’s delay enhances your pension by a shade under 5.8%.
If you are lucky enough to get the full pension of £159.55 then a one-year delay will increase that by £9.22 a week to £168.77.
The actual amount you get will be more as the new state pension rises each year with the so-called ‘triple lock’ of at least 2.5%.
In the past you could choose between the extra weekly pension and taking a lump sum. That is not possible under the new rules.
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Is deferring my pension worth it?
During those years of deferring you do not get your pension. If you defer a year and give up £159.55 a week you will have lost £8,296 in pension you did not draw.
Taking inflation into account you will have to live around 15 years to get that amount back over your lifetime from the higher pension.
Life expectancy at 65 is 21 years for a man. A woman who reaches state pension age this year will be around 64 years old and her life expectancy is 25 years, so most people will gain from deferring for a year.
If you defer for five years until you are 70 (69 for a woman reaching pension age this year) you will still probably end up better off. A five year delay on the full new state pension will mean you get a pension of £12,098 a year. But it will be 13 years before the total pension income received is more than if you started at normal pension age.
Most women who live to 69 will live another 20 years until they are 89, most men who make it to 70 will not die until they are 87. So on average men and women will live long enough to get back what they lost from deferring for five years.
How long can I defer my pension for?
You can defer as long as you like. But deferring for more than six or seven years will probably mean you end up worse off over your lifetime.
A note of warning: the Government says the new rate of increase is ‘cost neutral’. In other words the rate of increase has been calculated to ensure the Government neither gains nor loses on average from the rules. My calculations indicate that on average for the first five years at least you will make a little out of it.
But it is a risk and you should only defer if you really do not need the pension now. It is especially worthwhile if you pay higher rate tax now but expect to pay only basic rate on your income when you draw it.
The calculations are made more complex because the extra pension you earn from deferring is uprated each April in a different way from the rest of the pension. The new state pension itself is subject to the ‘triple lock’. It rises in line with earnings, prices, or 2.5% whichever is the highest.
But the extra pension earned by deferring is raised only in line with prices using the CPI measure of inflation. In April 2017, for example, the main pension rose by 2.5% but any additional amounts went up only by 1%.
If you expect to be claiming pension credit in retirement then boosting your state pension will result in getting less pension credit and will probably not be worthwhile. Any housing benefit or council tax support you get will also be reduced.
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How does life expectancy affect deferring my pension?
These figures assume you will live what is called the median length of time for someone of your age. In other words at that age half the people of your age have died and half would be alive.
If you live a shorter time than that median, perhaps because of ill health factors you know of or because you smoke, then you may end up worse off. If you live longer you will do better.
You can check your life expectancy here gov.uk/how-long-will-my-pension-need-to-last.
How will de-retiring affect deferring my pension?
If you have already drawn your pension you can give it up temporarily. It is called ‘de-retiring’ and you will get your pension enhanced by 1% for every nine weeks you give it up. You can then reclaim your pension when you want to.
Those readers who are older – in other words reached state pension age before the new state pension began – get more generous rises in their pension.
For each five weeks delay the state pension is increased by 1% which works out at a 10.4% increase for a year’s delay. So a pension of £120 a week would become £132.
If you delay by five years it will be 52% higher – turning a £120 pension into £182. The actual amount you get will be more as the basic pension rises each year with the so-called ‘triple lock’ of at least 2.5%.
If you expect to be claiming pension credit in retirement then boosting your state pension will result in getting less pension credit and may not be worthwhile. Any housing benefit or council tax support you get will also be reduced.
As an alternative to the higher weekly pension you can choose to be paid a lump-sum equal to the pension you have not received. The Government adds interest to it at a good rate of 2.5% a year.
The lump-sum also gets favourable tax treatment. It is taxed at the same rate as the rest of your income that year. So if you were a non-taxpayer the lump-sum would be tax-free and if you pay basic rate tax the lump-sum can never push you into paying a higher rate of tax.
Further information on deferring your pension
Go online to the government site gov.uk/deferring-state-pension
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