Retirement saving and pension planning
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This year, 330,000 people are projected by the Department of Work and Pensions (DWP) to qualify for their state pension in the UK. For many, particularly women, it cannot come soon enough. The equalisation of the state pension age (age 65 for men and women by November 2018) means that many women in their 60s are waiting years for their pensions. Only 80,000 women will get their pension this year compared to 250,000 men.

However, there are surprisingly large numbers of people of pension age who choose not to claim their state pension when it becomes due, so that they can draw a bigger pension later.

If you are in good health and expect to live for long enough to recoup the difference, then this is a piece of retirement planning you should read up on.

Those who reached retirement age before April 2016 are the big winners. The state pension increases by 1 per cent for every five weeks the pension is deferred. This works out at 10.4 per cent for a full year. By doing so, someone entitled to the full basic state pension before April 2016 of £125.95 per week (or £6,549.40 per year) can increase their pension by £681 per year.

Alternatively, they could get a one-off lump sum payment by deferring for at least 12 months in a row. This will include interest of 2 per cent above the Bank of England base rate — currently 0.75 per cent.

Even if the pension is deferred for several years the lump sum, which is taxable as income, will not push the pensioner into a higher rate of tax. A basic rate taxpayer will pay this rate even if the lump sum takes their income into the higher rate tax bracket.

People qualifying for the state pension after April 2016 get a lower rate of annual increase for deferment of 5.8 per cent, but this is on a larger state pension.

Newly qualifying pensioners can get up to £164.35 a week — up to £8,546 per year — depending upon their history of national insurance contributions. Those qualifying for the full amount who defer for one year will see their annual state pension increase to £173.89 per week, or £9,041.88 per year — an extra £493.

What is the payback period?

If you reached state pension age before April 6 2016, deferring your state pension for a year only really pays off after around nine or 10 years of receiving your pension. If you reached state pension age after April 6 2016, the payback period is around 17 years. This is a significant risk.

The DWP says that the calculations are made more complex because the extra pension you earn from deferring is uprated each April in a different way from the rest of the state pension. The new state pension itself is subject to the “triple lock”. It rises in line with earnings, prices, or 2.5 per cent whichever is the highest.

But the extra pension earned by deferring is raised only in line with prices using the CPI measure of inflation. In April 2017, for example, the main pension rose by 2.5 per cent but any additional amounts went up only by 1 per cent.

Statistically speaking, the risk of not getting your money back and more is lowest for those living in London and the Southeast, and the highest in Glasgow. In 2014-15, life expectancy at age 65 was highest for men in Harrow, where they could expect to live for a further 20.9 years, compared with only 14.9 years for men in Glasgow. For women at age 65, life expectancy was highest in Camden at 23.8 years and lowest in Glasgow at 18.3 years.

How widespread is it?

Currently, the DWP says about 1.1m people are getting extra state pension as a result of having deferred their entitlement — about 8 per cent of state pensioners. This is not surprising as 1.5m work beyond state pension age.

The DWP does not have figures for the number of people who are currently deferring their state pension to build a higher pension entitlement later in life.

Who should consider deferring?

You should only consider deferring the state pension if you are in good health, and do not need the money from the state pension now. It is most attractive for people who are still working or who have retirement income from a company or private pension which means the state pension would take them into a higher tax band.

One Financial Times reader, who first drew her state pension before April 2016, was horrified that her income from pensions and part-time employment put her into the higher tax bracket resulting in a big tax bill at the end of the year. She stopped her state pension for three years to increase her pension when she finally retired. This is called “de-retiring” and lasts for as long as the pensioner wants. She is now paying basic rate income tax.

She did not know deferment was an option when she first claimed her pension. Nor did she do any calculations on how long she would have to live in order to benefit from the deferment in the long term.

Another reader, who is now 70, deferred her state pension for several years and only claimed the lump sum when her daughter needed a deposit for a house following a divorce. It meant the DWP funded the Bank of Mum and Dad.

Around 32 per cent of those working beyond state pension age are self-employed. The 21 per cent growth in self-employment since 2000 has been fuelled by the over-50s, who account for 43 per cent of the people who start their own businesses, according to the Office for National Statistics. By the age of 70, almost 60 per cent of those still in work are self-employed.

Think carefully before deferring if you are receiving benefits, such as carer’s allowance, income support or widow’s allowance as you can’t get extra state pension if you received these benefits. Deferring can also affect how much you can get in benefits.

What other factors should I consider?

Jonathan Halberda, senior financial consultant at Wesleyan, says that clients considered deferring their state pension as part of their retirement planning. Two main factors come to the fore: how healthy they were and what tax rate they were paying.

“Drawing the state pension can help people to defer drawing other pension assets or using other investments,” he says. “Many of our policyholders are doctors who pay tax at the higher or additional rate even in retirement. They will always be on higher rate tax so there is no advantage in deferring their state pensions.”

Four months before you reach state pension age, you should receive a letter and booklet from the DWP telling you how to claim. That is the time to seek advice about whether deferment is worth considering for your own personal circumstances. Most pension advisers will provide one session free of charge, and over-50s can also make use of the government’s free Pension Wise service. Company pension scheme members may also be able to get further help from their pension provider.

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

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