If you were born before 6th April 1960, you will be entitled to your state pension on your 66th birthday. It is up to you to decide whether you should claim it or whether you should defer. Many other people who are a little further from their state pension age will also be considering what they should do.
Deferring the state pension is the default option – if you don’t claim your state pension, it won’t get paid to you, so claiming it is something you need to make an active decision about. But for a lot of people, deferring will be a good choice. Of course, you need to think about how long you defer for too.
As with all pension issues, there isn’t a simple answer and there’s a lot to think about. The main factors in your decision should be:
- If you defer, your pension will increase by about 5.8% per year for each year of deferral.
- You can’t have your deferred pension payments as a lump sum (this was an option for people who reached state pension age before April 2016).
- Average life expectancy for a 66 year old man is 19 years; for a woman, it’s 21 years.
- The state pension is taxable (although tax isn’t deducted from it before it is paid to you).
If you ignore tax and assume that you have average life expectancy, the mathematics say that it is better not to draw on your pension immediately; the optimal age for men to start to draw their state pension is age 68, whilst for women it’s 70. And this optimal age will change as the state pension age rises and as life expectancy changes.
If you are still working when you retire, the attractions of deferral are greater, as you’ll probably pay more tax on the state pension whilst you are working than once you have stopped. It may even be possible to avoid tax on the state pension by deferring. Paying tax at 40% on the state pension of £7,500 would give you an extra income tax bill of £3,000, so deferral can be particularly valuable.
There is another benefit to taking the state pension when it is due, too, particularly if you have stopped work. The guaranteed income which the state pension provides takes the pressure off of your other retirement savings, allowing you to use flexible spending strategies, which, in turn, means you can safely boost the amount you can withdraw from your retirement savings. The psychological benefit of having a guaranteed income which covers a large proportion of your essential expenditure also shouldn’t be ignored.
For many of us, there is an elephant in the room when we think about deferring the state pension or any other pension. What if we are one of the unlucky ones who don’t live as long as expected? And what if the average life expectancy figures are optimistic? If this is the case, the maths can still guide you. It’s possible to re-work the figures to establish when is the best time to take the pension, based on your own estimates, and a good planner can help you to do this, as well as helping you to avoid being too pessimistic (or optimistic!).
It is clear that what is right for one person is not necessarily right for another. It’s certainly not the case that everybody should defer their pension at state retirement age or that everybody should claim their pension at state retirement age. Having a clear Retirement Income plan will help you to determine when you should start drawing your state pension.
Philip Wise | firstname.lastname@example.org
Managing Director and Chartered Financial Planner