Should I take my deferred state pension as a lump sum?

29 November 2016

Q

I have deferred my state pension for two years and eight months.

I now have the option of either taking a lump sum, which will be taxed at 20% in my case, or an additional weekly pension on top of my basic state pension.

If I take the money in weekly payments, it will take about nine and a half years to get all of the deferred pension back.

What are the pros and cons of taking the lump sum instead of the additional weekly pension?

From
KG/Hayes

A

As you say, now that you have decided to draw your pension, you can either have an increased additional state pension income or take the extra money as a lump sum. While nine and a half years sounds like a long time, based on average life expectancy, you should live this long. Of course, it is for you to guess what your life expectancy might be.

The principal advantage of taking the deferred state pension as a lump sum instead of as additional income is that it will only be taxed at your current income tax rate, so no matter how much it is, it will not push you into a higher income tax bracket. In contrast, if you take the money in weekly payments, this could affect your income tax bracket.

Another plus is that the money is yours to spend or save as you wish. You don’t have to wait almost a decade to recoup the lost income.

The advantages of taking the money as a weekly payment include the fact that if you live longer than nine and a half years, you will continue to receive the increased state pension, so you could get more pension overall. Also, the amount pensioners receive usually goes up each year in line with the Consumer Price Index (CPI) rate of inflation.

Take a lump sum and you miss out on those increases. [CPI inflation could turn negative, but that would put us in a deflationary environment, something that has only happened once since 1960. The state pension has never been decreased.]

 

Finally, think about your family and how your decision could affect their inheritance.The lump sum would count as part of your estate, so it could be subject to inheritance tax when you die.

However, take the weekly sum and 50% may be inherited by a spouse or civil partner if you die before them.

Moneywise says: The benefits of deferring your pension

Many people don’t realise that they don’t have to take their pension as soon as they hit state pension age. Once you are within four months of reaching state pension age, you have to apply for it. If you don’t, unless you are on certain benefits, it will be automatically deferred.

Obviously, this means you can consciously defer your pension by simply not applying for it. If you do defer your pension, you don’t miss out on the money you would have received. For every nine weeks that you delay taking it, you get a 1% increase in what you will eventually receive. That works out as a 5.8% uplift for every full year you defer for, or £468 a year if you are due the full state pension.

However, if you hit state pension age on or after 6 April 2016, if you defer your state pension, you can only receive it as an additional weekly income. The option to take it as a lump sum is not available anymore unless you reached the state pension age before 6 April 2016.