Should I continue to defer my state pension or take it and open an Isa?

14 April 2015

Q

I retired just over 18 months ago, having worked over my official retirement age by six months to build a little more savings. I have not yet claimed my state pension and was wondering whether to do so? I was 67 in January so have two years owing to me and I heard that the government paid extra if you did not claim it straightaway. Is it best to leave it to grow or better to put it in a savings scheme such as an Isa?
From
SL/Stoke-on-Trent

A

There can be very good arguments for delaying when you start claiming the state pension if you don't need the income.

Your state pension is currently increasing by 1% for every five weeks you put off claiming - this is equivalent to a 10.4% annual increase.

These are very generous terms and to put this in perspective, those who reach state pension age from 6 April 2016 and delay taking their state pension will only see it increase by 1% for every nine weeks they put off claiming. This is equivalent to a 5.8% annual increase.

An important consideration is your health. If you're in very good health, there is a stronger argument for deferring because by living longer you could benefit from a greater total payout.

Alternatively, if you're in poor health then it is less likely to be beneficial to defer the state pension because you are less likely to live long enough to gain back the payments you have deferred. If you have a spouse or civil partner, they could inherit, part or all, of your extra pension if you die before you have claimed it.

You also have the option of taking your deferred pension as a lump sum. Any lump sum payment will include interest at 2% above the Bank of England base rate. Like the state pension, this is taxable, although only at the top rate you're currently paying, so make sure you won't be pushed into a higher tax band. We don't yet know whether the option of taking a lump sum will be available to those who reach state pension age from 6 April 2016.

Your overall decision on whether to take extra income, a lump sum or continue deferring isn't straightforward because the best outcome will depend on when you will die, which of course you don't know.

Your choice is likely to depend on whether you want or need the money, the state of your health and whether you want to access your pension so you have full control over your money.

The 10.4% annual increase you will gain is more than you would get by putting the money in an Isa.

[Video:1]