Are pensioners better off deferring their state pension for larger, long-term pots?
Criticised for being insufficient, maligned for poor access and constantly rising in its qualification age, the state pension has been a topic of huge contention and debate in the past decade.
The reality that most people come to realise very early on in their working careers is that their state pension entitlement will not be able to cut it alone when it comes to financially supporting them during life after work, and it should be noted that having some form of private pension set up as early as possible is of paramount importance to securing your long-term future and finances.
However, compelling new research data has suggested that pensioners could substantially bolster their income levels during their later years by simply choosing to selectively defer their statement pension, which would go a long way to helping the cause of low-income workers, who might simply find it untenable to assemble a meaningful private pension pot for their retirement in this post-recession era.
The idea of deferring state pensions is not a new one; the number of people taking this course of action has steadily grown in recent years as more people have been content to continue part-time work in retirement and thus have a greater flow of cash than they would have done in the past. A survey conducted recently by advisory organisation Towry illustrated that more than 65% of people currently over the age of 50 who are working full-time desire to carry on performing some type of paid work after they have decided to pull the curtains on their day-day career. And the prominence of this trend has been concretely asserted by recent figures from the Office for National Statistics which illustrated that the quantity of individuals aged over 65 who were still in employment totalled over a million.
The new found sovereign powers bestowed upon individuals with their pension pots in this yearís Budget will likely mean that the number of people carrying on work after retirement continues to grow, though it is still up in the air whether this will correlate onto the frequency of state pension deferrals in the future. Recent study figures from LV= illustrated that just 5% of people who have currently continued to stay in employment after they have exceeded the retirement age have actually opted to defer their state pension, even though the reality is that doing so would raise their total pot value by a staggering 10.4% each year.
At present, there are differing regulations about the deferral of state pension payments for males born before and after the 6th of April 1951, and females born before and after the 6th April 1953. Pensioners might be entitled to improvements in their state pension pot by simply deferring their payments from this source for a minimum period of 6 weeks. In cases such as these, pensioners would be able to enjoy a 1% rise in their total state pension pot for every 6 week spell they choose to defer their entitlements from it for.
This means that for all who retire prior to April 2016, they will be able to enjoy a 10.4% rise in their pots each year.
Good for the old; useful at all for the young?
Despite the nature of the rules for those who intend to retire before 2016 serve favourably for bolstering their pension pots, the same isnít entirely the same for the proceeding generations, though Pensions Minister Steve Webb did note that the rate of deferring by people in this category was actually a higher 5.8%.
Tom Hargreaves Lansdown head of pensions research Tom McPhail has argued that the recent changes to pension regulations for younger generation has meant that the value of deferring for them will take far longer to be realised than their older predecessors, which might make it a less attractive proposition moving forward in the future.
He said: “The government is using the last day of term to shovel out the less popular outstanding announcements before heading off on holiday. “The reduced rate of increase now means that someone choosing to defer for one year will now have to live for about 19 years to benefit from the decision. This compares with about only ten years under the current rate of increase of 10.4%.
“This might still be an attractive proposition for someone in good health, with substantial private savings, or who is willing to carry on working.”
Merits subjective to personal situation
Whilst the merits of deferring your state pension are undeniable, it can be argued that it is the logistics of doing so which has meant that more people have not felt compelled to do so. For example, if you are someone who carries on working after your retirement, then you will not be particularly fazed by deferring your state pension entitlements, as you will still be in a position to financially support yourself. However, if you do not enjoy this luxury, or have a history of poor health, then keeping up your working endeavours might become untenable, and thus the decision to defer your state pension might end up having graver consequences than you initially anticipated.
It should also be noted that stricter inheritance rules over the pension entitlements of a surviving partner in the event that their spouse dies are getting tighter and more stringent, which might mean that your husband or wife might be left in the lurch, without any payments if you deferred, in the event that you unexpectedly passed away.
You will have to consider all these things before making the final verdict about whether to defer your state pension, and ultimately whilst the benefits of doing so are concretised, the logistics are not and you should meticulously evaluate your personal situation to make sure you come to the right decision for you and your family.
Take the example of Jordan, a graphic designer and site manager who has been planning for his retirement.
If Jordan retired prior to April 2016, and had assembled a state pension pot of £14,000, then he would stand to bolster the value of entitlements by a staggering £1,456 in just one year by choosing to defer his payments. By opting to embark on a two year referral, he would be able to raise it by an even larger £3,062.
The magnitude of these deferrals are put into perspective when you consider that if Jordan has chosen to take his state pension immediately, he would be subjected to the 2.5% fixed rate and his pension pot would only increase by £350 after one year and just over £700 on completion of the second.
Essentially, the deferral is a no-brainer, but reality will often limit a personís financial scope to do this as they will have to ask themselves how they will be able to support themselves whilst they wait for their state pension pot to shoot up. If you are someone who has retired but still is in some form of employment then choosing to defer your state pension will be a realistic and attainable option. Moreover, if you have a relatively high level of money saved away in an ISA, then you could fall back on this during your deferral year, and enjoy obtaining tax-free income whilst you are at it.
For younger generations, the merits of deferring their state pensions are not as greater as their older counterparts, though this is not to say they are not existent. For anyone who already has an index based pension pot or has their partnerís pension pot integrated into their own, deferring could mean a higher payout eventually.