- On August 9, 2017
When it comes to planning for your future and assessing the funds you’ll have available for your retirement it’s easy to overlook the state pension.
Some people who are still a way off from hanging their working hat up believe the state pension won’t exist by the time they’re eligible, while others tend to dismiss it as an insignificant element of their retirement planning.
However, the state pension can add a significant sum to your monthly income, especially for a couple. And what a lot of people also overlook, or are unaware of, is that you can actually increase your pension amount by deferring taking it.
With a growing number of people working beyond retirement age, deferring can make a lot of sense. And with the life expectancy for both sexes increasing it’s highly likely you’ll live to see the benefit of this decision.
Deferring is actually a very simple process. When you’re within four months of your state pension age you should receive a letter from the Government telling you what you need to do to claim it. Surprisingly, you don’t automatically get your pension.
If you wish to defer, you just do nothing. If you don’t send this letter back to claim your pension then you’re automatically treated as someone who has deferred.
Once you’ve deferred, your state pension then rises by 1% every 9 weeks, which works out to just under 5.8% for every full year, assuming that you’ve reached pensionable age on or after April 6, 2016.*
A one-year delay could mean you will receive £168.77 a week instead of £159.55, which is the current full pension rate.
However, a word of caution here, any extra payments you receive as a result of deferring could mean you pay more tax if they push your total income above your Personal Allowance (currently £11,500 per annum).
But is it worth it?
The question many people will ask at this point is ‘is it worth it?’. In short, the answer depends on how long you live. But, as we’ve said earlier, life expectancy figures suggest you are likely to be financially better off in the long run.
Here’s an example: Pamela reaches state pension age in November 2017, having turned 64 in August. At this age, her life expectancy is a further 21 years.*
She has decided to defer her pension for a year meaning she gives up £159.55 (£8,396) as she qualifies for the full state pension.
She needs to live for a further 15 years to get this sum back through her increased pension payments which is perfectly feasible when you look at her life expectancy.
There are also other factors to consider, such as whether you have other sources of income and how much money you expect to need in retirement.
It’s worth bearing mind that when people retire they often go on a spending spree, with holidays, hobbies and home improvements all top of the list.
But over time this tends to tail off, so you need to ask yourself whether you need the money immediately to help you do these things, or whether you can afford to enjoy life without it.
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