I am a 66-year-old, semiretired woman. I have a part-time job and a £6,000 annual income from a small private pension. I have deferred my state pension since November 2012 – just over fi ve years. I am unsure how long to continue working, but know I need to have a plan for my state pension. The problem is I can’t decide whether to take the deferred sum as a lump sum payment or as an enhanced pension. Can you give me some guidance at to what is my best choice? I will not have a vast retirement income and don’t have a large amount of savings either, so I want to make the best choice for long-term funding. As far as I am aware, I am in good health.
It’s worth highlighting that the lump sum option is only available to those who reached state pension age before 6 April 2016.
If you opt to receive your deferred state pension as a lump sum, then you will have the full amount of money at your disposal. While this gives you more flexibility, there is also the concern that you could spend the money too quickly and leave yourself short of funds in the future.
But if you choose to receive it as an income, it can take a decade or more to receive all the money back. If you had reached state pension age after 6 April 2016, it would take even longer as the system is now less generous.
You must take your state of health into account, but it’s worth saying that, according to Office for National Statistics figures, a 66-year-old woman in average health can expect to live 20 years or more.
You will also benefit from annual increases in the state pension that you wouldn’t get with a lump sum payment.
You must also consider the effect on any benefits you receive. Receiving extra state pension as higher weekly payments could reduce the amount you get in pension credit, housing benefit or council tax reductions, for instance. You can see a full list of affected benefits at Gov.uk/deferringstate-pension/extra-state-pensionand-lump-sum-payments.
Similarly, if you take a lump sum, the benefits and tax credits system may reduce the amount of help you get because your ‘capital’ has increased.
Helen Morrissey is the personal finance specialist at Royal London. Find out who our experts are on the Ask the Experts homepage.