Will waiting add up?
THE retirement age may be 66 but you are not obliged to take your state pension then.you could delay taking it and claim more retirement income later.
For every nine weeks you defer, you will get 1 per cent extra state pension for the rest of your life. By deferring for a full year, you will get 5.8 per cent more.
That would give you an extra £10.74 a week from age 67, which adds up to £558.48 a year.the minimum deferral period is five weeks.
These figures apply to those who retire on the new state pension, which came into force on April 6, 2016.
Deferring works best for those who are fit, well and want to continue working, said Becky O’connor, Interactive Investor’s head of pensions and savings: “If you tick all those boxes, it is worth considering.”
If you are an employee, working past 66 should also mean you can pay into a workplace pension scheme for longer, which should further boost your income when you finally retire, O’connor added.
Deferring is actually the more straightforward option, said Alice Haine, personal finance analyst at wealth platform Bestinvest: “Roughly two months before your 66th birthday you will receive a letter giving you two options, to claim or defer your state
pension. If you defer, you don’t need to do anything, as it will automatically be deferred until you start claiming it.”
Deferring could work for those who have not yet built up the 35 years of qualifying National Insurance contributions needed to receive the maximum new state pension, Haine said.
Working on and making NI contributions could help make up the shortfall. “This might work for women who took time out to care for children or elderly relations, workers who took a lengthy career break, or were selfemployed with low earnings,” Haine said.
This might also apply to expatriates returning from working overseas who did not make voluntary contributions while they were away.
“By making your NI contributions you will get more state pension when you finally do claim, on top of the extra from deferring it,” she said.
Workers on a good salary who want to push on beyond 66 also have an incentive to defer their state pension, as the payments could push them into a higher tax bracket once added to their total annual income from all sources.
“It might make sense to defer taking your state pension to lower your income tax burden, particularly if it pushes you into paying higher-rate tax,” Haine said.
Inevitably, there is also a downside to deferring. If you defer for a year you will currently sacrifice £9,627 of state pension, and it can take years to make this up, if you ever do.
Typically, you will have to live for another 15 years to break even, depending on how rapidly the state pension rises in future, O’connor said.
“So you have to live to at least 81 or 82 for your decision to pay off.the longer you live after that, the more you will have profited from your decision.”
If tempted, deferring is a complex decision with both pros and cons, but for the majority of us it is a no-brainer.
Most people need their state pension as soon as they can claim it, especially today, as living costs rocket. It is what nine out of 10 of us choose to do.