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Stop the clock: many people choose to delay collecting their state pension in exchange for higher payments
Many people choose to delay taking their state pension in exchange for higher payments later in retirement.
Some also do it accidentally, by not filing on time when they turn 66. This is because if you do nothing, your state pension will automatically be deferred.
The delay can be beneficial, especially if you are still earning a salary and want to prevent your state pension – valued at £11,500 a year at full rate – from increasing your income tax bill.
But there are traps for the unwary, especially those who don’t realize that the option to receive all 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 younger pensioners who mistakenly relied on receiving a large sum of cash when they finally lodged a claim.
They are surprised to discover that they will only receive larger state pension payments in the future.
And to add to the confusion, they are still left with the option of backdating their claim for 12 months in exchange for a lump sum (but no interest) for that period only.
Below, we explain the pre- and post-2016 state pension deferral schemes. And Steve Webb, now a partner at LCP, offers his five golden rules for maximizing your chances of benefiting from a delay.
Savers who reached state pension age and deferred it before April 2016
Many people who deferred their payment before 6 April 2016 have already claimed their state pension, but we still often hear from those who have not yet done so.
If you find yourself in this situation, you still have the option, under the old rules, of a lump sum plus interest or a higher state pension with an extra 10.4 per cent added for each year you defer.
Savers who reached state pension age and deferred it after April 2016
As of April 6, 2016, the lump sum option is gone and you get an additional, less generous 5.8 percent added to your payments for each year you defer.
But, as mentioned above, you can choose to backtrack your claim by one year and get a lump sum for that period.
You lose the 5.8 percent increase for the lookback period and it only applies to the balance of the time you deferred.
One more thing to note is that if you defer under 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 receive the lump sum.
Steve Webb issued a warning about this after receiving a question in his column This is a grieving family’s money that had been lost.
Another thing that many people don’t know is that, if you wish, you can stop your state pension after you start collecting it, but only once.
State pensions have just seen two sharp annual increases in a row: 10.1 percent, followed by 8.5 percent.
But Webb says having a more valuable pension doesn’t change things in any way, as the increase from the deferral is proportional to the pension at the beginning, but so is the amount you lose by not collecting your pension.
Meanwhile, regarding future increases to your state pension after it starts, you should be aware that the extra sum you receive for deferring it does not increase in line with the triple lock (higher of inflation, wage growth or 2, 5 percent) each year. but it is linked to inflation.
This year, the triple lock increased the new flat-rate state pension and the old basic pension by 8.5 percent because the salary element was the highest.
However, the increase in whatever sum people got for deferring payment was decided by inflation, which was 6.7 per cent.
Steve Webb explains how to make deferring the state pension work in your favor
1. As many readers have discovered through painful experience, if you do anything less than straightforward when collecting your state pension (apart from claiming it on time), you risk facing delays and hassles that simply aren’t worth it if you just It’s going to be a few months late.
2. Broadly speaking, the deferral is designed to be a “fair deal” with the Government generally neither winning nor losing; but some people will tend to gain by differing and others will tend to lose.
For example, if you are in good health and likely to have a long retirement, you will probably benefit because your enhanced pension will last a long time. Conversely, if you are in poor health, you may not get back the money you lost by deferring payment.
3. For those who reached retirement age before 2016, before 2016 they could choose between receiving the fruits of the deferral as an enhanced state pension or as a lump sum, but under the new system they basically get a higher pension at a rate of 5.8. additional percent for each year of deferral.
The only exception to this is that you can backdate your claim for up to 12 months and receive a lump sum for that period; No interest is added to this lump sum.
4. Deferral cannot be used as a way to obtain low-income benefits. If you defer your pension and try to claim pension credit, you will in any case be treated as if you had claimed your pension.
5. A possible advantage of deferring is if you are still working and, in particular, if you have a relatively high income. Her tax-free personal allowance is likely to be used up by his salary, so her state pension will be fully taxed from the first pound.
If this takes you into higher tax brackets, you could end up paying 40 per cent or more of a portion of your state pension. Deferring to a point where you have no income could avoid this risk.
>> Read Steve Webb’s most popular columns on the state pension
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