Should you defer your state pension?

If you are due to reach state pension age (SPA) before 6 April 2016, you could give your state pension a sizeable boost by deferring it.

Deferring your pension is often a no-brainer for healthy 60-somethings who are still working or lucky enough not to need the income yet. However the terms are so good that even those who do have the need for income could make some serious savings and boost their income over the long term by drawing on other assets first.

For men who are born before 6 April 1951 or women born before 6 April 1953, the government will increase your weekly state pension by 1% for every five weeks you defer, which rolls up to 10.4% over a year. This is on top of any inflation increases.

So a person who reaches SPA in 2015 and starts drawing their pension immediately would get £115.95 a week or £6,029.40 over the year. By deferring for one year, that weekly payment would rise to £128.01 a week or £6,656.46  over 12 months.

Once you've deferred for a year, you can take the money as a lump sum. The money is treated as if it were in a savings account paying 2% over bank base rate, meaning a 12-month deferral could give you a lump sum of £6,180.

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"This is extremely generous," notes Alan Higham, retirement director at Fidelity, and as a result he suggests that even those retirees who do need some income should juggle their finances to ensure they can cash in, too.

Take the example of a retiree with approximately £6,000 a year coming in from the state pension and £100,000 in private pension. To ensure they can cover all their expenses they need a further £1,900 a year to bring their total income to £7,900.

To secure that additional income for life, a 65-year old man would have to spend approximately £55,000 from the private pension on an annuity. A 62-year-old woman would need to spend around £66,000. However, thanks to the new rules the retirees could simply draw their desired income of £7,900 a year from their pension to live off without needing to commit to an annuity or start drawing their state pension.

After three years, the increased state pension would be worth around £7,900 a year and the retiree will have spent less than £25,000 and still have the bulk of their private pension to use as they choose.

For women who have seen their state pension age increase, this can be a great way of recouping lost income, and the fact that you can take the money as a lump sum means that if your health has suffered you don't need to live years before the benefit of higher weekly payments outweighs your initial loss of income. You don't have to miss out either if you are already drawing your state pension - you can get the same terms if you suspend payments for a period of time.

That said, state pension deferral won't be for everyone: "If you have nothing else to live on, you won't be able to do it," says Higham, "but people with alternatives should at least consider it as it can substantially increase your guaranteed income."

Sadly, the deal isn't so good for those reaching state pension age after 6 April 2016. For these retirees, the rate of increase will be just 5.8% a year and the lump sum option won't be available, meaning you'll need to be in good health as it will take longer for the benefits of bigger payments to exceed the cost of your lost income at outset. Under the current terms you would only have to live 10 years to make deferral worthwhile but under the reduced terms it would take 19, according to Hargreaves Lansdown.

"For the second group, the terms are not as good but they could still be better value than an annuity so it's worth checking it out at the time," says Higham.

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Your Comments

I am in my third year of deferral as I have been living off the 25% cash-in on my private pension when I turned 65. The 10.4% increase is on the original pension, so the annual increase every year can be calculated as Original Pension x 10.4% x No. of Years Deferred.
It's a toss up on how long one expects to live, since the time it takes to make up the lost income increases  with each year of deferral (No. of Years = Total Income Lost divided by Extra Income Gained). This works out at exactly 6 months more for each extra year of deferral, so after the first year it will take 9.6 years, after the second 10.1 years, after the third 10.6 years, and so on.
This article doesn't cover what happens if one should die before drawing any pension, since that is a whole new can of worms and needs an article for itself! As I understand it, one's spouse or legal partner may be able to claim the extra pension accrued (but not the basic pension), either as a Pension or a Lump Sum, but there are conditions.

Does anyone know the exact position if you die after deferring the state pension? Can your widow claim the basic pension and the extar pension acrued?

Richard, pages 30-33 of this document from the DWP may help: