Could it be the right move to put your State Pension on ice?
It’s a little-known fact that retirees can defer their State Pension and get a higher income when they claim it later in retirement. Men born before 6 April 1951 and women born before 6 April 1953 can boost their State Pension by 10.4% for every year of deferral – about twice what they could reasonably expect to achieve from investing in equities – and it is guaranteed by the government.
Holding back the years
For someone who has sufficient income or savings to live off in the meantime, delaying the State Pension can be attractive because the benefits really add up. For instance, someone who receives a State Pension of £115.95 a week could boost their income by over £60 a week if they deferred it for five years.
How the benefits add up
Unfortunately for people who have not reached State Pension age by 6 April 2016, the rate boost for deferring will almost half to 5.5% a year. The move is expected to save the government £200 million per year by 2020, and £300 million per year by 2030.
Ian Price, divisional director at St. James’s Place, says, “With people living longer and staying in the workforce longer, the cut is not that surprising even if it’s still disappointing. However, it demonstrates the generosity of the existing arrangement for those who are eligible.”
Making it stop
Anyone who reaches State Pension age before 6 April next year can benefit from the annual 10.4% increase by deferring. Even if you have already started taking your State Pension, you can stop drawing it and benefit from the future uplift potential. Payments can be resumed at any time if circumstances change; individuals who start suffering from poor health, for instance, may prefer to restart their payments. However, you can only stop payments once.
For people who can manage without the State Pension for a while – perhaps because they are still working – deferring holds an obvious appeal. “If you are already receiving taxed income from other sources, like paid employment, the decision to defer your State Pension could even mean you sidestep having to pay a higher rate of Income Tax,” says Price.
For some people, waiting a bit longer is a straightforward decision given the potential benefits. But the fact is the majority of people choose not to do it.
Much can depend on how long you expect to live. The main risk of deferring your State Pension is that you don’t live long enough for it to be worthwhile, and you or your family miss out on the income that you could have taken.
If you’re eligible to receive a State Pension of £115.95 a week but choose to defer it, you will miss out on more than £6,029 in income for each year you defer. Based on the 10.4% enhanced pension – working out at £627 more per year – it would be around 10 years before the decision to defer your State Pension started to pay off, so you need to decide if it is in your interest to wait that long.
As life expectancy at age 65 is around 18 years for men and 21 years for women, most people in good health will gain. If you have medical problems, or lower than average life expectancy, deferring could be a gamble.
Another point for consideration is related to the recent pension freedoms and how these are affecting how people designate their pension. Following the change to the way pensions are taxed on death, more and more people are using their defined contribution (DC) pension as a tax-efficient way to pass wealth on to children.
“If the plan is to bequeath some or all of your pension to your heirs, diverting some of your State Pension to your DC pension as soon as you reach State Pension age would probably be more appropriate,” advises Price.
Retirees looking to defer their State Pension should always seek appropriate advice as deferring could affect other areas of financial planning and some other welfare benefits.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.