State Pension Deferral
Procrastination can be a bad habit, but when it comes to claiming your state pension putting off claiming can pay off.
If you already have enough to live on at state retirement age, you can earn interest from the government by deferring your pension. You can choose to receive either a bigger weekly pension when you eventually claim, topped up by 1 per cent for every five weeks of delay; or a lump sum, with interest paid at 2 per cent above bank base rate (currently 0.5 per cent).
When you reach state retirement age (currently between 60 and 65 for women and 65 for men) you can postpone claiming for any period from at least five weeks to indefinitely, although the minimum period for the lump sum option is one year.
What’s best? A bigger weekly pension, the lump sum or to claim the pension and invest it yourself?
If your pension is worth £100 a week, let’s say, and you delay a year, then it will rise by an extra £10.40 a week (£541 a year) for life when you claim. Alternatively, the lump sum would be a one-off £5,270 and your weekly pension would then be paid at the normal rate.
Taking the lump sum can be attractive, especially if you expect to be in a lower tax bracket when you take the money as the taxman only charges you tax at the rate you already pay. This means if you expect to be a non-taxpayer you will receive the full £5,270 in the above example, while a 20 per cent taxpayer would receive £4,216. Also, the sum does not affect eligibility for state help such as housing benefit (although it may affect tax credits) and your age related personal allowance (the extra amount the over 65s can earn without paying tax) is unaffected.
The increased pension option can be tempting as few investments offer a 10.4 per cent return over a year and the extra you earn is paid for life, although the eventual pre-tax higher income may affect any state benefit entitlements and it is counted as income for tax purposes, just like the normal state pension.
If you claim your pension and save it, you can obviously do what you like with the money. The drawback for taxpayers who use it to invest is that they pay tax twice: on the pension income and on any returns on taxable investments. An advantage though is that when you die all the money will end up in you estate to distribute as you choose. Inheritance under deferral is more complex because what happens depends on your marital status, the decision you made about deferral and at what point you die. A widowed spouse or civil partner may inherit the lump sum or receive a higher pension but if you are not married or in a civil partnership heirs may only get three months worth of your pension.
Everyone’s position is different, and all the rules cannot be explained fully in this short column so it is wise to take independent advice before deciding. For more information on deferral go to direct.gov.uk or dwp.gov.uk.
Originally published in the Evening Advertiser, by Warren Shute