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How much lump sum if I defer state pension?

Retirement | State Pension Helpful? 11

Asked by RichardAbraham, submitted 17 December 2010.

Open Quote If one defers state pension for twelve months, at the present pension, what would be the lump sum prior to tax?

When would one receive the lump sum, at the date one defers or at the end of the twelve month period?

After the initial twelve months can one again defer for a year, and so on?
End Quote

Answered by Justin on 20 December 2010

If you defer your state pension there's the option of receiving a higher ongoing pension or a taxable lump sum.

Choose the higher ongoing pension and you'll receive an extra 0.2% for every week deferred, equal to 10.4% a year - you must defer for at least 5 weeks for this option.

Otherwise if you defer for at least a year you can instead opt for a the lump sum, calculated as the unclaimed pension plus interest at 2% above the Bank of England Base Rate, i.e. 2.5% at current rates. Your state pension will then be paid at the prevailing rate, so there's no extra pension as per above.

Assuming your unclaimed pension is the basic £97.65 per week (rising to £102.15 from 6 April 2011) and the interest paid remains 2.5% then you'd expect to receive around £5,311 if you delay your state pension by a year (calculated as £5,244 of unclaimed payments and about £67 of interest).

The lump sum is only paid once, at the point you start taking your state pension. So if you defer for 5 years then you won't receive the lump sum for 5 years. Unfortunately there's no option to take the lump sum as you go along year by year.

Hope this helps, you might also find this article I wrote about delaying the state pension of interest.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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