Should retirees defer their state pension?

A recent survey by LV= found that 65% of over 50s still in full-time employment intend to continue to do some form of paid work during their retirement. This is a growing trend, as the Office of National Statistics revealed in 2013 that the number of over 65s in work exceeded one million.

With the new pensions flexibility announced in the last Budget, this number looks set to grow, but it's clear that whilst many people are continuing to work post state retirement age, the LV= research found that just one in 20 (5%) have deferred receipt of their state pension, despite the fact that this could increase its value by up 10.4% a year. At present, different rules apply for men born on or after 6 April 1951 and women born on or after 6 April 1953.

Retirees may earn extra state pension if they put off receiving it for at least five weeks. Such individuals' state pensions will increase by 1% for every five weeks they put off claiming, or 10.4% for every full year they defer. This applies to all those who reach state pension age before April 2016, but the rules changed in the last Budget.

For those reaching State Pension Age after April 2016, the rate of increase for deferral decreases to 5.8%, a rate described as ‘actuarially fair’ by Pensions Minister Steve Webb.  Regardless of the rate change, the probability exists that the majority of retirees aren’t aware that this is something they can do.

The reduced rate of increase now means that someone choosing to defer for one year after April 2016 will have to live for about 19 years to benefit from the decision, in comparison to just ten years under the current rules. Although this may still be an attractive proposition for someone in good health, with substantial private savings and possibly willing to carry on working, things don’t look so attractive to those in poorer health and they may wish to take benefits when they first become available.

If future income tax rates are lower than the deferral rates presently being paid, deferral has merit where life expectancy is normal, but any expectation that this may be shorter than average will bring the upsides into question.

There are clearly benefits in deferring the state pension for some, so if you’re approaching state pension age this is something that you should perhaps consider. Make sure you discuss how this affects you with your adviser. 

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