I try not to think about state pensions too much. Mine seems a long way off and I figure by the time I do eventually get there it won't be worth very much.
At the moment there are roughly three workers to fund each pensioner, when my generation retires it's predicted there'll be nearer one. The numbers don't add up. So unless everyone ends up paying a lot more tax, there's a baby boom, or the state retirement age continues to rise, I'm expecting very little from the state.
But, what if you're retiring far sooner? A relative who's about to reach state pension age recently asked me whether they should delay taking it as they're still working and could live without the money for now. I haven't looked at this for a while, so I did some research and was so surprised at the difference it could make I thought it worthy of an article and new calculator.
What happens if I delay my state pension?
If you put off receiving your state pension, including SERPS and S2P, the Government promises a higher pension when you subsequently start taking it. Or you have the option of taking the missed payments, plus interest, as a lump sum.
How much extra will I get?
Provided you put off claiming for five weeks or more you'll receive an extra 0.2% of your weekly pension for every week you delay taking it – i.e. an extra 10.4% of your weekly pension for every full year deferred.
Suppose your state pension at retirement is £100 and you delay by a year. If the pension is £102 a year later (assuming 2% inflation), then with the extra 10.4% your pension will be £112.61.
Alternatively, you can opt for a lump sum if you defer taking the pension for 12 months or more. It's equal to the unclaimed pension plus interest of 2% above the Bank of England base rate – 2.5% at today's rates.
How's it taxed?
If you opt for an increased pension it's taxed as normal, i.e. added to any other income and subject to income tax.
The lump sum is also subject to income tax, but at your existing rate - it can't push you into a higher tax band and doesn't affect your age related personal allowance.
What if I'm already receiving my state pension?
You're allowed to stop your pension once, so you can still delay your pension provided you haven't already done so in the past. It's rare, but might be relevant if you return to work or receive ample income from elsewhere. Bear in mind if your spouse if getting some state pension based on your NI contributions it'll stop that part of their pension too.
What happens when I die?
If you have a surviving husband, wife or civil partner they will normally be entitled to the additional weekly basic state pension payments you received due to deferring and between 50-100% of any increased SERPS/S2P payments depending on when they were born (it's 50% for men born after 5 October 1945 and women born after 5 July 1950).
If you choose to receive a lump sum but die before receiving it, the lump sum will form part of your estate. If you die without having decided whether to opt for a lump sum or increased pension the executor of your will makes the choice.
Is it worth delaying?
If you need the money then obviously not. But assuming you don't then it's ultimately a gamble on how long you delay versus how long you live.
The interest on the lump sum is unappealing in this low interest rate climate; although at 2.5% it does at least compete with reasonable savings accounts.
However, the increased pension could be very worthwhile if you're confident of a long life - especially if you have a spouse who might outlive you and benefit from further payments.
Mr Hopeful is about to reach his 65th birthday and due to receive a total state pension of £130 a week. If he defers for five years and starts the pension at age 70, the weekly pension would increase to £197.60. To break even Mr A would need to live past his 80th birthday. If he lives to 86, his average life expectancy, he would be £19,356 in profit as a result of deferring. But if he dies aged 74 he would have lost out by £19,309, assuming he had no surviving spouse who would have received an increased state pension as a result.
More information & tools
To help you compare various scenarios I've put together a State Pension Delay calculator – hope you find it useful.
If you want to read more about delaying your state pension the Government has a hefty tome here.