We will use your email address only for sending you newsletters. Please see our Privacy Notice for details of your data protection rights.
For some, receiving their state pension is something they will opt to do upon reaching state pension age. Others, however, may opt to defer the payment for their own financial reasons.
It’s something which Kay Ingram, Director of Public Policy at LEBC Group has shared expertise on.
Speaking to Express.co.uk, the chartered financial planner said: “It is possible to delay the start of state pension payments and if an individual chooses to do this, they will get a higher pension per week to make up for the payments foregone.
“Whether this is a good idea or not depends on personal circumstances.
“The extra paid for delaying the state pension varies, depending whether the individual reached their state pension age before or after April 6, 2016.”
So, what does deferring mean, depending on when a person reached their state pension age?
Pre April 6, 2016
“Generally, the extra paid for delaying is more generous for those who qualified for state pension before this date,” commented Ms Ingram.
“A delay of five weeks or more gives rise to an increase in the weekly pension later paid.
“They also have the option of taking the increase, either as a weekly top up or, if they delay for a year or more, a lump sum, payable when they start the pension.
“In the event of their death before they start drawing the pension there is a lump sum payment or regular increases to the weekly pension payable to any spouse or civil partner who survives them.
“The rate of increase under the pre 2016 scheme works out at a rate of 10.4 percent per year.
“Where the lump sum is chosen the total income given up has interest added to it at rate of two percent over Bank of England base rate. This is currently 2.1 percent.”
No doubt, the decision as to whether a person defers, and how they defer their state pension, will depend on personal circumstances, as Ms Ingram explained.
The chartered financial planner said: “Whether to take the lump sum or not depends upon:
- The individual’s health and that of their civil partner or spouse
- The tax rate paid by the pensioner
- Whether they have need of a lump sum eg to pay off a debt or fund a large purchase such as a car or home improvements.
“Those in good health are likely to benefit most from taking the extra as a weekly income top up, providing they live for nine years or more after starting the pension, they will break even and be in profit from then on.
“The weekly top up, once in payment, also receives an annual increase which is linked to the increase in Consumer Price Inflation (CPI) while the basic state pension increases by the higher of inflation, average wage increases or 2.5 percent.
“If in poor health, a lump sum may be better unless their spouse is in good health, as they will inherit the top up for their lifetime.
“Whether paid as a lump sum or as an income it is taxable, but the lump sum payment will only be taxed at the individual’s usual rate of tax, even if the lump sum would normally have pushed them into higher rate tax.
“Someone who is still working and already a higher rate taxpayer may be better off waiting until their employment ends and their tax rate falls or taking the increase on a weekly basis.
“Where a deceased deferred pensioner qualified for state pension before April 6 2010 a widow may claim the top up payment but not widower, nor a cohabiting partner who is not married or a civil partner.”
Post April 6, 2016
Ms Ingram also explained how the system works for those who reached state pension age after April 6, 2016.
“For those who reach state retirement age after April 6, 2016 the offer is less attractive,” she commented.
“The increase is awarded in the same way but only after nine weeks delay or more and the rate of increase works out at 5.8 percent per year.
“Additionally, there is no option to take a lump sum, nor for the spouse or civil partner to inherit the top up.
“For those wishing to benefit from delaying their pension a basic rate taxpayer would need to live 17 years post pension start date before they break even.
“To delay the start of state pension payments you simply need to do nothing as the state pension will not start to be paid until you claim it.
“Someone who has deferred their state pension and has no spouse or civil partner dies, their estate may claim three months state pension payments.
Ms Ingram went on to highlight a lesser known aspect of the state pension rules.
“It is also a little-known fact that those already in receipt of state pension can suspend payments and then earn the same increases in the weekly pension payable as described above,” she commented.
“The scenario where this may make most sense is a pre-2016 claimant, who has surplus income, may be a higher rate taxpayer and is married to a younger healthy spouse who has little pension in their own right, as the deferral of payments can be paid after death to the surviving spouse or civil partner.
“It can also be a way of saving for potential care costs in old age when pension payments can be restarted at the higher level.
“Those claiming certain state benefits are not eligible to defer their state pension start date.”
Source: Read Full Article