Should you defer your state pension?
Feature
by Moneywise
Q: My husband is due his state pension in a few weeks' time. However, he still works on a self-employed basis and won't need to touch his pension for two years. What is the best way forward?
A: Peter Chadborn is a director and co-founder of Plan Money.
If your husband doesn't need the money he should consider deferring his state pension for two years until he stops working. By doing so he'll increase the amount he'll get later on.
One option is to claim an extra 1% for every five weeks deferred. Over a two-year period, this would equate to an additional 20.8% a month. This increased amount will normally be increased annually in line with his original pension entitlement.
Alternatively, as long as he has deferred claiming for at least 12 months, he can claim a taxable lump sum. This will equal the amount of pension he'd have received, plus interest equivalent to 2% above the Bank of England base rate.
The disadvantage of deferring is that if your husband dies, his state pension ceases, so the deferred income will have effectively been lost. However, depending on certain circumstances, you may be able to claim a proportion of the additional pension.
Of course, the disadvantage of taking his state pension now is that he'll be receiving income which is not required, which will be subject to income tax.
You could increase your retirement income by up to 40% depending on your medical situation
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I've just finished a deferment of my State Pension. The rationale is that I was getting 10.4% uplift annually which even though taxed was an improvement on the interest rate on my savings. I ran down my savings and eventually asked to go on pension. It took ages...........................!
I applied at the beginning of February and after three weeks of fiddling around, having originally informed me that they didn't need any additional documentation they suddenly decided that they needed to inspect my original Birth Certificate. They then had four goes, by two different departments, at calculating my State Pension. Although the last effort was more right than previous efforts it is still not correct. It hasn't helped that NP49, which is the government "help to financial advisers" has now been withdrawn for a rewrite. However it is rewritten it won't change the original legislation so I can't understand why it has taken so long for DOHSS to get it right. The staff that feed the computers seem to be confused!
Yes, I still think that deferment is a good idea but make sure that you have plenty of cash to get you through the lean months whilst dealing with the DOHSS. You'll need it!
You need to consider carefully the implications of delaying. You won't get any more by taking a taxable lump sum unless taking weekly payments now puts you in into a higher tax bracket, which won't hapen when you eventually take the lump sum. Take a lump sum and you'll only get what you would have got without delaying and give the government a free loan in the process. Meanwhile you lose out on any savings income had you invested the weekly payments. Ignoring inflation, delaying a year say, then taking enhanced weekly payments instead of a lump sum, it will take 11 years to break even on money paid to you so life expectancy must come into the equation as well.
I too wonder about when to claim my OA Pension. I am 75 next month and have not yet given up working albeit now partime of one ot two days per week. It is enjoyable to associate still with people I have known for years at work.
My firms pension, BT, I do receive each month.
The reason now I have not yet claimed my OAP is that my tax threshold would increase such that all my pension would be liable to the higher, 40%, tax rate.
Any comments about still leaving it there?
I am fortunate to still be in good health.
If the person who had deferred their pension dies, the I believe the lump sum, ie what would have been paid in the period of deferment, becomes part of their estate, so it isn't lost.
I deferred my State Pension for almost 6 years. When the time came to claim my pension I found it asmooth process, the adviser in the DWP Call Centre was excellent and it was quickly sorted. I decided to take the deferred pension as a lump sum as although the amount I would have received weekly would have more than doubled the basic state retirement pension it would have taken me over my tax allowence and have been subject to income tax which would have eroded it substantially. I chose to take the lump sum in the tax year following my retirement and as long as my taxable income for the year does not exceed the higher retirement rate the lump sum will be tax free, I have just 6 weeks to go and my income hasn't and won't exceed my tax allowance. I made sure I read and understood the DWP pamphlets and timed my retirement and pension claim dates carefully.
Deferring the OA Pension can cause two problems depending on circumstances.
1 If you have other income, the increased pension can mean you lose the higher tax free allowance for over 65's.
2. It can mean that the increased pension brings you into the higher rate tax bracket.