Continue delaying state pension?
Asked by Jocky on 13 August 2010
[Retirement | State Pension]
I Deferred my State Pension for 3 years and have had an indication of the extra now available.
The extra pension (as at 1 August 2010) is estimated at £41.71p per week, giving a total pension of £159.00.
A lump sum £20,272, subject to Standard Rate Tax.
I am age 71, single and have a comfortable investment portfolio. My current non-inflationary Occupational Pension is £19,500 per annum.
Please advise some options I might consider or avoid.
Answered by Justin on 16 August 2010
Your first decision is whether to take your deferred state pension now or continue waiting.
If you don’t need the money then your state pension will continue to increase by either 0.2% per week until claimed (equal to 10.4% a year), or the value of the unclaimed payments plus annual interest of 2% plus base rate (so currently 2.5% a year).
Should you continue deferring and pass away before taking the pension (or lump sum) then the executor of your will can decide whether to request the lump sum or, if applicable, that the pension is paid to a surviving spouse.
You might find our State Pension Delay Calculator helpful to compare various scenarios, but I guess the main factor affecting your decision is whether you need (or can make better use of) the money now rather than in future.
If you decide to take the pension now then you’ll need to choose between the higher ongoing pension and the lump sum. Both are taxable, but the lump sum would simply be taxed at your current rate - that is it can’t push you into a higher tax band and won’t affect your increased age-related personal income tax allowance.
Whether the higher pension or lump sum is a better choice depends on how you look at it.
Your extra weekly pension of £41.71 is equal to about £2,169 a year. To buy an inflation-linked pension of this amount via an annuity would cost you around £42,000 (based on current rates), so from this point of view the extra pension is better value than the £20,272 lump sum.
However, if we assume inflation (CPI) of 2% then it would take about 9 years for the sum of the extra pension to equal the lump sum, i.e. to reach breakeven (and longer still if you successfully save or invest the lump sum).
So, without wishing to sound morbid, the decision between taking the pension and lump-sum largely rests on how long you expect to live – especially as you’re single because there’d be no benefit from a spouse’s pension.
The average life expectancy for a male aged 71 is 87 years old (see our Calculator), in which case you’d probably profit from taking the higher pension versus the lump-sum.
But, of course, few of us actually end up being ‘average’ so you’ll ultimately need to use your own judgement when deciding what to do.
I hope this gives you some food for thought and best wishes whatever you decide.