State pension age? You could boost sum by more than £25,000 without doing anything at all

Financial expert gives advice on reducing risk on pensions

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By deferring one’s state pension, which means to delay claiming it, British pensioners could end up with more money down the line when they eventually do claim. Some people could make more than £25,000 by deferring their state pension.

Pensioners do not automatically get their state pension, they have to actually claim it. People nearing retirement should get a letter no later than two months before they reach state pension age, telling them how to go about claiming their pension.

At this point, one will have two options. They can either claim their state pension right away, which is £179.60 per week for the full new state pension and £137.60 for the full basic state pension, or wait and defer claiming it.

If a pensioner decides they want to defer, they do not have to do anything at all, and their pension will be automatically deferred until they choose to claim it. That means that by doing absolutely nothing, pensioners could eventually improve the value of their pension and receive more money in the long run – although they won’t get the monthly sum during that time.

But exactly how much can one get by doing this? The amount of extra state pension that can be received through deferral depends on when the pensioner reached state pension age, as this will determine whether they fall under the ‘new’ or ‘old’ state pension rules.

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Old state pension rules

These apply to people who reached state pension age before April 6, 2016. These people can usually choose to take their extra state pension as either higher weekly payments or a one-off lump sum. When they claim their deferred state pension, they will receive a letter asking how they wish to take it. They will have three months from receiving that letter to make their decision.

By choosing the higher weekly payments option, one’s state pension will increase for every week they defer, as long as they defer for a minimum of five weeks. Their state pension will increase by the equivalent of one percent for every five weeks they defer, which works out as 10.4 percent for every 52 weeks.

As an example, someone who receives the full basic state pension of £137.60, who defers for one year (52 weeks) would get an extra £14.31 per week. The extra amount would be paid along with one’s regular state pension payment.

To get a one-off lump sum payment, one must defer claiming their state pension for a minimum of 12 consecutive months. This lump sum will include interest of two percent above the Bank of England base rate.

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The recipient will be taxed on the lump sum at their current rate. Basic rate taxpayers will be taxed at 20 percent for example.

However, the examples above are far from the most someone could stand to benefit by deferring their pension, as thousands of pounds could be available.

It is important to note that even though people who defer will receive extra state pension when they eventually begin claiming, it will take time for them to catch up on the amount they missed out on by not claiming in the first place. This means that in order to make deferring one’s pension worth it, they may need to collect their pension for 10 or even 20 years once they do claim.

People who decide to delay taking the state pension would still be in substantial deficit five years after they start receiving it, under both the old and new system.

Under the old system, one’s deferral would have started to pay off after 10 years. As an example, under the old state pension rules, delaying for three years would mean a profit of almost £3,000 after 10 years of collecting one’s pension.

Here are some of the potential gains that pensioners could receive by deferring their pension, according to calculations by Which?:

Under the old rules, someone deferring their pension for one year would see a ‘profit’ of £262 after 10 years of receiving their pension, whereas someone deferring for three years before collecting would receive £2,985 in extra income after 10 years of collecting.

Taking this further, a person delaying claiming their pension for one year would receive an extra £7,074 after 20 years of collecting their pension, compared to an extra £25,618 for someone who deferred for three years before collecting their pension for 20 years.

New state pension rules

This applies to people who reached state pension age on or after April 6, 2016. Their state pension would increase for every week they defer, as long as they do so for at least nine weeks. It would increase by the equivalent of one percent for every nine weeks they defer, working out as just under 5.8 percent for every 52 weeks deferred.

That means someone receiving the full state pension of £179.60 a week could get an extra £10.42 a week, but this could of course be larger depending on how long one defers for.

However, using the new pension rules, it appears to be more difficult to profit from deferring one’s pension. Even after collecting the pension for 10 years, pensioners would still be losing money and would need to collect for a longer period to make it worth their while.

A person deferring their pension for one year and then collecting it for 20 years would benefit to the tune of £1,365, whereas someone who delayed for three years before collecting for 20 would pick up an extra £5,863.

Deferring one’s state pension will not be right for everyone, as anyone looking to do this will need to be confident that they will live long enough to reap the financial rewards, but for some it could be a prudent way to increase their retirement income long-term.

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