I deferred my state pension: how much will I get if I take it now?

18 September 2019

Q

I was able to draw my state pension in March 2016, but decided to defer it.

As I come under the old pension rules, I understand that by deferring my state pension by a year my pension is uplifted by 10.4%. However, I am not sure whether after each year the 10.4% is added after the interest increase or whether the 10.4% uplift is only ever on my original state pension. I presume I also accrue the yearly state pension increases?

I am now considering whether to draw my state pension on a monthly basis and pay the 40% on the income (as I work too) and invest the state pension. I would like to know how much my state pension has increased by after deferring since 2016, and whether to carry on deferring.

I have tried writing for a pension forecast based on my deferment history, but I have not received a reply. Could you advise me?

From
CR/Camberley

A

As you reached state pension age before April 2016, your state pension increases by 10.4% a year. This is a 1% increase for every five weeks that you defer. When you claim your state pension, the increase will be applied as a ‘simple interest’ rate to whatever is the state pension at that time.  For example, if you defer your state pension for 200 weeks, the state pension at the time you draw will be increased by 40%.

As your state pension was due before April 2016, you have the option of taking the deferred payment as a lump sum or as extra income. 

As you rightly say, the state pension counts as income when working out if any income tax is payable. This means you will have to pay tax on your combined income (your earnings from work and the enhanced state pension) that is above your personal tax allowance. This may take you into the higher-rate tax bracket.

The amount of tax you may have to pay on a lump sum payment is worked out differently. The lump sum is not added to the rest of your income to work out your total income for tax. Instead, the rate of tax due on your lump sum will usually be the highest main rate of tax that you pay on your other income including any state pension you get once you have started to claim it.

In other words, if your combined income (your earnings from work and the basic state pension) is below the 40% tax band, you will only pay basic-rate tax on the lump sum. It may therefore be beneficial to take the lump sum rather than the enhanced pension – especially if you take the lump sum in a year when you are a basic-rate taxpayer.

It is often only possible to determine whether it was worthwhile with hindsight. The deferral rate of 10.4% a year that applies to you is considered to be generous and generally pays off if you live nine to 10 years after you start drawing your state pension.

The factors that determine whether it makes sense to defer include how long you expect to live, your total income in retirement and the tax rates that may apply to you during deferral and after and other state benefits that you may have been eligible to receive.

If you die before drawing your state pension, your beneficiaries would receive the lump sum that you would have received if you had opted to draw your state pension the day before you died.

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