A recent Towry survey has found that 65 per cent of over-50s still in full time employment intend to continue to do some form of paid work during their retirement.
Many individuals choose to work beyond state pension age either because of preference or necessity, and therefore the decision on whether to defer the state pension is being faced by a greater number of people.
Under current rules, individuals who put off claiming their state pension will get an extra 1% for every five weeks that they defer. This income deferral rate totals a 10.4% increase annually. For someone eligible for the full current state pension of £113.10 per week, this basic annual state pension of £5,881.20 will be increased by £611, should they defer. In the current environment where interest rates remain at historic lows of 0.5%, this is certainly compelling – especially for what must be considered a very safe investment.
Also under current rules, if someone defers claiming their state pension for at least 12 months, there is the option of instead taking a one-off lump sum payment. This lump sum, less income tax, will be based on the amount of pension forgone with interest added. Whilst not as generous as the income deferral rate, it includes interest of 2% above the Bank of England base rate – so may well still be favourable to those who either prefer a lump sum for whatever reason or where the lump sum may suit their longer term tax plans.
So, where income is not required immediately, the decision to defer under current rules is perhaps not a difficult one unless an individual’s health issues indicate that the increased income may not be received for long enough to make up for income lost during the deferred period.
However, changes are afoot from when the new single tier pension, expected to be worth around £155 per week, arrives in April 2016. This is because the annual return on deferral is to be reduced to 5.8%, while the lump sum option will also be withdrawn. An annual state pension of £8,060 would be increased by £467.48 to £8,527.48 under the new rules. At 5.8%, the benefits of deferral are much more evenly balanced so the decision will very much depend on personal circumstances. For individuals who are in good health and who can afford to delay their state pension, then it may still be worthwhile. But those in poorer health may wish to take benefits when they first become payable. The rules on a spouse or civil partner inheriting the enhanced pension on death will also be much tighter, and could easily lead to little or no benefit being given to the survivor on the death of a deferring party.
Certainly where future income tax rates are likely to be lower than rates presently being paid, deferral has merit where life expectancy is normal. However any expectation that someone’s life may be shorter than average will bring the benefit of deferment into question. There is also the question about how long to defer, and at the new proposed rate it does not take too long before having income in your pocket now starts to look preferable versus delaying it until a later date. Definitely, where health issues lead to an expectation of a shorter life then delaying your pension may not be the sensible choice.
In summary, where you are fortunate enough to be due to receive your state pension before the changes and you don’t feel the need to take the income, then seriously consider deferring. If however you will end up on the new single tier pension then it is probably only worth deferring if you will be saving income tax in the long run.
By Andy James, head of retirement planning, Towry
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