Deferring the State Pension has plenty of pros and cons (Birmingham Post Article 15.11.2018)

Thinking of deferring the State Pension?

Time to carefully calculate whether you are likely to be better off or not.

And, as part of that process, you need to confront you own mortality – how long do you think you have got? Not a question many of us are comfortable addressing.

As many people carry on doing some work after they have reached State Pension age deferring is increasingly a common practice.

This is despite the scales tipping against doing so.

The rules changed in 2016 to reduce the amount by which the pension is increased if it’s deferred – approximately from 10.4 per cent to 5.8 per cent for each year deferred. This effectively lengthened the time it takes to catch up the missed pension.

Steven Cameron, pensions director at Aegon, told Moneywise: “Broadly speaking if you reached state pension age after 6 April 2016 you would need to live a further 17 years before deferring for one year starts to make sense. Under the old rate, it only takes nine years to break even.”

2016 also saw an end to the ability to take the deferred pension as a lump sum.

The average life expectancy at age 65 in the UK is 18.2 years for men and 20.9 for women.

This could make deferring the State Pension a tempting option if you are eligible for the pre-2016 rate, but less clear cut if you are not.

If you are in ill-health then best take the State Pension straight away; if you have a family history of members living into their 80s and 90s then deferring could be a possibility.

Those looking to work on past State Pension age have a particular decision to make because any State Pension you draw is added to your taxable income for the year.

Speaking to This Is Money, former Pensions Minister Steve Webb noted: “If you are earning more than the tax-free personal allowance (currently £11,850 per year) then the whole of your State Pension will be subject to income tax.

“If your total taxable income goes above £46,350, then some of your State Pension could even be taxed at 40 per cent.

“By contrast, if you defer taking your State Pension until you have stopped earning then all of your personal allowance of £11,850 will be available to be set against your State Pension and other pensions, meaning you will probably pay less tax overall.”

Something else often missed is that the extra pension resulting from deferral doesn’t benefit from the Triple Lock – it just increases in line with CPI.

The Triple Lock is where your pension rises by the greater of inflation, wage growth or 2.5 per cent every year. However, deferral increases are not protected by this guarantee and only go up in line with the consumer prices index, the Government’s preferred inflation measure.

Although the state pension rose by 2.5 per cent in April 2017, the uprated portion only rose by one per cent.

Remember also, you don’t get your State Pension automatically – you have to claim it. You should get a letter no later than two months before you reach State Pension age, telling you what to do.

If you want to defer, you don’t have to do anything. Your pension will automatically be deferred until you claim it.

So, do your sums. Your tax position and life expectancy will be major factors.

What is it they say? A bird in the hand is worth two in the bush.

If it’s not immediately needed, having the pension straight away and investing/saving it for later might well be worth considering.