A risk-free return of 10.4% a year is hard to come by, with the failure of bank and building society interest rates to keep up with rampant inflation only adding to the attraction. Such a return might appear far-fetched, but it’s exactly what is available for people who reached their state pension age before 6 April 2016.
By deferring their state pension (called the old state pension), people in this group have the option to receive an increase in their weekly pension equivalent to 1% for every five weeks they delay, adding up to 10.4% if they defer for 52 weeks. Based on the 2022/23 pension of £141.85, which kicked in from Monday 11 April, this equates to an extra £14.75 a week.
People who reached state pension age on or after 6 April 2016 also receive a rise in their state pension (called the new state pension) by deferring. At the equivalent of 1% for every nine weeks they defer, this works out at just under 5.8% over the course of 52 weeks. Based on the 2022/23 new state pension rate of £185.15, this equates to an extra £10.70 a week.
The triple lock
The extra amount people receive by delaying is based on the Consumer Prices Index as recorded in September of the preceding tax year. In September 2021, the CPI was 3.1%. Following Chancellor Rishi Sunak’s recent announcement that he intends to reinstate the triple lock, based on Bank of England predictions for the rate of inflation in September 2022, from 2023 the additional amount paid for deferring could rise by more than seven per cent. The triple lock guarantees that the state pension increase by either 2.5%, the rise in average earnings, or by inflation, whichever figure is the highest.
As long as they delay taking their state pension for at least 12 months in a row, people who qualified for their state pension before 6 April 2016, also have the option of receiving a lump-sum. The lump-sum will include interest of 2% above the Bank of England base rate.
In addition to guaranteeing a higher pension in the future, or for some a lump-sum, delaying taking the state pension could also be a useful way of protecting your wealth.
This could prove particularly advantageous if you are in a higher tax bracket, or if receiving the state pension would push you into a higher tax bracket, but you expect to be in a lower tax bracket in the future.
For those people who are in the financially comfortable position of not needing to take their state pension, deferring taking it undoubtedly has its attractions, especially if you are part of the older group entitled to the more generous terms. Perhaps some people are continuing to work beyond state pension age, or they have other sources of income.
By not taking up their entitlement today, individuals are assured of a higher income in the future, when they may have a greater need for it, for example entering retirement, or needing to pay for care costs.
Against that, there are strong arguments to suggest that a delay in taking your state pension may not be such a good idea.
Doing the sums
The big question is whether you are going to live long enough for the additional money you receive in the future to match what you would receive by taking the state pension immediately. This is of course unknowable, although factors such as a person’s state of health, their age and how long they expect to live can help inform any decision.
From a financial perspective, the more confident a person feels they will live beyond this ‘break-even point’ the more attractive a decision to defer becomes. A rough calculation suggests that this works out at around nine years and seven months for those who qualified for a state pension before 6 April 2016, and just over 17 years for those in the younger group.
Then there is what you give up by not taking your state pension, what economists call the opportunity cost, such as a higher standard of living and the freedom to do more of what you want in life.
Don’t defer, invest it
Even if you don’t need the state pension to support your day-to-day living, by investing it you may well be able to generate a return that matches or perhaps exceeds the 10.4% and the figure of just under 5.8% mentioned above. What’s more by investing you will benefit from compounding. You might also choose to use it to help your children with their education, or with the deposit on a house.
Deferring the state pension until later in life will certainly be appropriate for some, especially for those who qualified for it before April 2016. As always with financial matters, the decision to do so or not will come down to a range of factors and individual and family circumstances, something your personal adviser can help you look into.
- If you wish to defer taking your state pension, you don’t have to do anything.
- Unless you claim it, it will be automatically deferred.
- The minimum amount of time you can defer a state pension is five weeks if you reached state pension age before 6 April 2016, and nine weeks if you reached state pension age after that date.
- Any extra state pension income will be taxed.
- People in receipt of certain benefits or tax credits cannot build up extra state pension.
- Receiving extra state pension could reduce certain benefits and tax credits.
- A person can inherit their partner’s extra state pension, although certain conditions apply.
- Additional rules apply where a person’s partner died before they claimed their state pension.
Further information: https://www.gov.uk/deferring-state-pension/what-you-get