To defer or not – State Pension

For some of us the state pension age is fast approaching. Where that is the case you should receive a letter from the Pension Service, certainly no later than 2 months before you reach that milestone.  You do have to actually claim the state pension to receive it and how you do so is laid out in the correspondence. In the vast majority of cases you will make the claim and the pension will be paid across, usually within 5 weeks of reaching state pension age.

If the claim is not made then, effectively, you are deferring taking it until a later date of your choosing. The failure to claim might be down to sheer forgetfulness, which can happen on occasions. However, there may be some circumstances where you might want to actively consider deferment. You can still defer taking the pension even if you have already started drawing on it.

It very much depends upon each person’s individual circumstances whether to defer or not.

• You might already have sufficient income to live off and the state pension might simply be adding to your capital base.
• You could be an additional higher rate taxpayer at this moment and the state pension would take you into the higher rate tax bracket or over the £100K threshold at which point your personal allowances will start to be lost. Whereas you may be retiring in 2 or 3 years’ time at which point your taxable income levels may fall, resulting in the state pension being taxed at a lower rate than at present.
• Likewise, deferring may be appealing if you have emigrated or are about to do so to a country where your state pension isn’t subject to the UK’s annual increases such as Australia.

Some people also see the deferral as a sort of savings account which will boost their state pension when they actually take it. How big the boost is depends upon when you have reached pensionable age, pre or post 5 April 2016 and for how long you defer. For example, if you reached pensionable age by 5 April 2016, for each full year your deferred state pension would increase by 10.4%. Reaching state pension age post that date, and deferring the pension for a full year, the increase falls to 5.8%.

When you actually draw on the state pension that income then becomes taxable. If you were of pensionable age by 5 April 2016 you can either simply opt for the increase to be reflected in your monthly state pension going forward and taxed in the normal way, or take the deferred amount as a lump sum which will be taxable at the marginal rate the rest of your income is taxed at for the year in question.

So, for example, if you paid tax on your other income at 20%, or 21% in Scotland, then the whole lump sum would also be taxed at that rate. However, if you are of pensionable age post 5 April 2016 then you can only choose the monthly route.

Deferring the state pension will clearly not be right for the majority of people but should definitely be considered based upon the individual circumstances. Other factors such as your health and, going forward, the impact upon claiming other state benefits should also be considered. We are happy to discuss this with you.

Bearing in mind, for one reason or another, the errors made in allocating the National Insurance contributions made to the correct individual’s records, it is recommended you should review your state pension eligibility on at least a five-year basis.