Daniel Kern, Senior Financial Adviser

The new rules of deferring your pension

If you are retiring after April 6, 2016 and decide not to claim your state pension immediately, when you finally do the amount you receive will be increased.

The amount of the increase is 1% for each nine weeks you defer, therefore, a deferral for one year would enhance a pension by just under 5.8%. A full state pension of £159.55 would increase over the year by £9.22 a week to £168.77. The starting amount would be in excess of this amount due to the ‘triple lock’ annual increase of at least 2.5%.

In the past you could choose between the extra weekly pension and taking a lump sum. Under the new rules you are not permitted to take a lump sum.

Do I defer?

During the deferral period, one does not receive a state pension. If you defer for a year and give up £159.55 a week you will have lost a total of £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.

Given that life expectancy for a man aged 65 is a further 21 years and for a woman aged 64 (approximately the average age a woman has to be to get the state pension this year) is 25 years, most people will gain from deferring for a year.

Even 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 should live 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 should I/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. If one has a history of ill-health it is almost certain that deferring pension is not a wise option to take.

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.

But it is a risk and you should only defer if you really do not need the pension now. It may be especially worthwhile if you pay higher rate tax now but expect to pay only basic rate on your income when you do 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 currently 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.

It should also be remembered that under the old rules the extra income could be taken as a lump sum, but now it can only be taken as income. Additionally, under the old regime a deferred pension could be transferred to a surviving spouse, however, there are no survival rights attached to the new state pension.

Pensions pre-6th April 2016

It should be remembered that any State Pension which was deferred under the old regime pre-6th April 2016 will continue to increase at a rate of 10.4%, this can be paid as a lump sum, and can provide a benefit for dependents in the event of death.

The lump sum option exists if the payment was deferred for at least 12 months in a row and includes additional interest of 2% above the Bank of England base rate.

Most people are unaware that one can defer a pre-6th April 2016 State Pension already in payment and the accrual rate of 10.4% will continue to apply until it is reinstated.

Daniel Kern, Senior Financial Adviser

If you would like to know more about how we as Financial Advisers can help you  with your Pensions and overall Retirement Planning then visit the Retirement Planning section of  our website: Retirement Planning  or send us email at: email@fiduciawealth.co.uk

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