Written by Karen Bryan
Update 25 September 2013 – There are proposals afoot to reduce the benefits of UK State Pension Deferral by halving the increase to 5% and ditching the lump sum option.
In the UK, there is the option to delay taking your state pension, officially called State Pension Deferral, in order to receive either a larger pension or a lump sum payment. You can defer your State Pension regardless of whether you continue working or not.
As an example, if you agree to start drawing your State Pension one year after you are eligible to receive it, you will receive a 10.4% increase in your State Pension payable from one year later. While that sounds like a pretty good deal, if you are still working or have other income on which to live for that year, you have to factor in the loss of the State Pension for one year.
The basic State Pension is currently just over £110/week, totalling £5,720 a year. Therefore a 10.4% boost to that sum, would give you an additional £595 a year in income. However it would take almost ten years to make up for not receiving your State Pension for that one year. Assuming a retirement age of 65, you are likely (on average) to live for more than another ten years. If you live past the age of 75 then you are a winner, as you’ll receive that higher pension for the rest of your life.
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The alternative financial incentive to defer your State Pension is to receive a (taxable) lump sum equivalent to the pension payment which you have foregone. You receive interest of 2% above base rate on that lump sum. So a one year deferral would give you a lump sum of £5,834.
Would I defer my State Pension and if so, which incentive would I choose?
The lump sum option doesn’t appeal to me but getting a State Pension which is 10.4% higher for a wait of one year sounds good. As my state retirement age will be 66, I’ll have to see what my health is like then, to judge if I’m likely to live for at least further ten years. I’ll also calculate if we have enough income on which to live comfortably without my State Pension for one year. If I’m still working, State Pension deferment will be more possible, especially as my earned income would get a 10% boost from not having to pay National Insurance contributions. It could also be a good move to use some savings to top up our income for that pensionless year, as I doubt if our savings will be earning an interest rate of anything like 10.4%.