Your State Pension – should you draw this or defer until later?
You have been working hard all of your life, and you are approaching retirement. You have been paying your National Insurance contributions and you will be entitled to a weekly State Pension based on your National Insurance contributions and the current maximum weekly pension that you could be entitled to is £168.60 or £8,767.20 annually.
You are entitled to the pension from your State Pension Age but there is no obligation to draw this if you don’t necessarily want to.
What are your options? Should you delay taking your state pension to get bigger payouts later? What are the pitfalls?
Will you benefit from delaying payments?
Maybe – but it depends on whether you will plan to work on past state pension age. This is because any state pension you draw is added to your taxable income for the year.
If you are earning more than the tax-free personal allowance (currently £12,000 per year) then the whole of your state pension will be subject to income tax. Further, if you are a higher rate taxpayer, then any State Pension that you will draw will be subject to 40% tax, so you in reality only receive 60% of your entitlement until you stop working.
By contrast, if you defer taking your state pension until you have stopped earning then all of your personal allowance of £12,000 will be available to be set against your state pension and other pensions, meaning you will probably pay less tax overall.
How does deferral work?
You will get 1% extra pension for every 9 weeks that you defer. So, if your weekly pension was £100, and 9 weeks forgone buys you an extra £52 per year in the future. This works out to be an extra 5.8 per cent for deferring. What this means in reality is that if you deferred your pension for one year, you would need to receive the pension for about 18 years to recover the money you missed in the first year, not taking account of the interest you could have earned on that money!
Given that the average 65-year-old man is likely to live to 86 according to official figures it is only those who are longer-lived on average who are likely to benefit most from deferral (apart from the taxation point noted above).
Will a delay affect future increases in my state pension?
It is worth being aware that the extra amount of state pension you receive for putting off taking your pension is treated in a slightly different way when it comes to future annual increases to take account of inflation.
Whereas your original pension amount is uprated at least by the growth in average earnings the extra pension you receive for deferral is only uprated in line with price inflation.
So in summary, in most cases it would be beneficial to draw the State Pension when you are entitled to it as there are few benefits of deferring this unless you expect to carry on working past your State Pension Age. But remember that State Pension stops and dies when you die and is not passed to your surviving spouse.
For more advice around State Pension or Retirement planning, Contact us today to arrange a FREE consultation, we have Chartered Accountants and Tax Advisers in Canary Wharf, Essex and Manchester waiting for your call.