Want to delay your state pension in exchange for higher payments? Watch out for the pitfalls… plus Steve Webb’s five golden rules revealed
- If you do not request it, your legal pension will be automatically deferred
- The deferral can be beneficial, especially from a tax point of view if you still receive a salary
- But there are pitfalls for the unwary, including a 2016 lump sum rule change.
Stop the clock: many people are choosing to delay their state pension in exchange for higher payments
Many people choose to delay their state pension in exchange for higher payments later in retirement.
Some also do it accidentally, by not applying in time when they turn 66. Indeed, if you do nothing, your state pension will be automatically deferred.
Deferral can be beneficial, particularly if you’re still earning a salary and want to avoid your state pension – worth £9,600 a year at full rate – adding to your income tax bill. returned.
But there are pitfalls for the unwary, especially those who don’t realize that the option to receive all your unclaimed payments in one tidy lump sum (plus interest) was removed in April 2016.
Our dying uncle and former Pensions Minister Steve Webb regularly hears from young pensioners who mistakenly bet on receiving a large sum of money when they finally filed a claim.
They are shocked to discover that they will only receive larger state pension payments in the future.
And to add to the confusion, they still have the option of backdating their request by 12 months in exchange for a lump sum (but without interest) for this period alone.
Below we explain the pre and post 2016 state pension deferral systems. And Steve Webb, now a partner at LCP, offers you his five golden rules to maximize your chances of benefiting from a delay.
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Savers who reached the legal retirement age and deferred before April 2016
Many people who deferred before April 6, 2016 have now claimed their state pension, but we still often hear from those who have not yet done so.
If you are in this situation, you still have the choice, under the old rules, between a lump sum plus interest or a higher state pension with an additional 10.4% added for each year of deferral.
Savers who have reached the legal retirement age and postponed after April 2016
As of April 6, 2016, the lump sum payment option is gone and you get a less generous 5.8% supplement added to your payments for each year you defer.
But, as mentioned above, you can choose to backdate your claim by one year and get a lump sum for that period.
You lose the 5.8% increase for the backdated period, and it is only applied to the remainder of the period you carried forward.
Another thing to keep in mind is that if you postpone the new system and die before claiming, your beneficiaries will only receive three months of backdated state pension. Under the pre-2016 system, they could get the lump sum.
Steve Webb sounded a warning about it after receiving a question to his This is Money column from a bereaved family who had missed out.
Another thing many people don’t realize is that you can stop your state pension after you start collecting it if you want, but only once.
Steve Webb explains how to make the state pension deferral work in your favor
1. As many readers have discovered through painful experience, if you do something that isn’t straightforward when taking your state pension (other than claiming it on time), you risk getting face delays and hassles that just aren’t worth it if you’re only going to be a few months late.
2. Generally speaking, the deferral is designed to be a “fair deal” from which the government neither wins nor loses overall; but some people will tend to win if they postpone and others will tend to lose.
For example, if you are in good health and are likely to have a long retirement, you will likely benefit because your enhanced pension lasts a long time. Conversely, if you are in poor health, you may not get back the money you missed by deferring.
3. For those who reached retirement age before 2016, there was a choice of taking the fruits of the deferral either as an enhanced public pension or as a lump sum, but under the new system, you essentially get a higher pension at a rate of 5.8. Additional % for each year of deferral.
The only exception to this rule is that you can backdate your claim up to 12 months and collect a lump sum for that period; no interest is added to this lump sum.
4. You cannot use the deferral as a way to get benefits due to low income. If you defer your pension and attempt to claim a pension credit, you will be treated as if you had claimed your pension anyway.
5. A potential benefit of deferring is if you are still working, and particularly if you have a relatively high income. Your tax-exempt personal allowance will likely be depleted by your salary, so your state pension will be taxed in full from pound one.
If this puts you in higher tax brackets, you could end up paying 40% or more on a slice of your state pension. Postponing to a point where you have no income could avoid this risk.
>> Read Steve Webb’s most read columns on public retirement
How much is the state pension?
The full flat-rate state pension is currently £185.15 per week and will increase in April to £203.85 per week or £10,600 per year.
People who retired before April 2016 on a full basic state pension receive £141.85 a week, and this will increase in April to £156.20 a week or £8,120 a year.
The old basic rate is supplemented by additional state pension rights – S2P and Serps – if they were acquired during the working years.