State pension
How this fits in to overall pensions received
You don’t automatically receive your state pension, you have to claim it. You have the option to either claim your state pension or delay it by deferring claiming your pension income that you are due.
Some people of pension age choose not to claim their state pension when it becomes available, so they can draw a bigger pension later. The two main factors you need to consider if this is an option you intend to pursue is how healthy you are and what tax rate are you currently paying.
Deferring may affect the benefits you receive
Deferring the state pension may be more appropriate for those people who are still working or who have retirement income from a company or private pension which means the state pension would take them into a higher tax band.
You also need to think carefully before deferring if you are receiving benefits, such as carer’s allowance, income support or widow’s allowance as you can’t get extra state pension if you received these benefits. Deferring may affect how much you can receive in benefits.
The longer you delay, the more you’ll receive
However, some people may find they receive more money if they delay claiming it. In general, all the weeks they put off claiming their state pension will count towards an extra state pension, but this is not always the case.
To receive an extra amount of state pension, you need to delay taking it for a minimum amount of time. By doing this the amount you receive will depend on when you reached state pension age and how long you delay taking it. The longer you delay, the more you’ll receive.
Receiving an extra state pension income
If today you’re reaching state pension age, or you have reached your state pension age since 6 April 2016 and you delay taking your state pension for at least nine weeks, you’ll be able to receive extra state pension income when you eventually start taking it.
There’s no option to take a lump-sum payment and your state pension will increase by 1% for every nine weeks you put off claiming. This works out at just under 5.8% for every full year you put off claiming.
Extra income usually increases in line with inflation
If your reached your state pension age before 6 April 2016, you need to have delayed claiming your state pension for at least five weeks. Your extra state pension will increase at 1% for each five weeks you put off claiming for.
This works out at roughly 10.4% for every full year you put off claiming. The extra income is taxable and will usually increase each year in line with inflation.
You can choose to take a lump sum payment instead
Or, rather than take the extra amount as additional income added to your state pension, if you put off claiming your state pension for at least 12 months in a row, you can choose to take a lump sum payment instead. This will include interest of 2% above Bank of England base rate. The lump sum is taxable at the same rate as your other income.
If you delay claiming your state pension, or stop receiving it for a while, you won’t pay tax on it during the time you’re not getting it. The tax you pay when you start receiving the state pension you’ve put off receiving will depend on how the money is paid to you.
If you want to defer, you don’t have to do anything
If you reached state pension age after 6 April 2016, you’ll receive the state pension you didn’t receive paid in the form of an increased income. This will be taxable as earned income in the normal way. If you reached state pension age before 6 April 2016, you have a choice.
Drawing the state pension may however help some people to defer drawing other pension assets or using other investments. If you want to defer, you don’t have to do anything. Your pension will automatically be deferred until you claim it. If you choose to have the state pension you didn’t get paid as an increased income, this will be taxable as earned income in the normal way.
Taxed at your current rate of Income Tax on a lump sum
If you choose to take the state pension you didn’t get paid as a lump sum, this will be taxed at your current rate of Income Tax on your lump sum payment. For example, if you’re a basic rate taxpayer your lump sum will be taxed at 20%.
Four months before you reach state pension age, you should receive a letter and booklet from the Department of Work and Pensions explaining how to claim. When you decide you want your state pension to begin, you need to submit a BR1 claim form to the Pension Service.
If you’ve already started to receive your state pension
This is unless you’re receiving certain benefits before you reach state pension age. In this case, you’ll need to tell the Pension Service that you want to ‘defer’ taking it. (In Northern Ireland, this would be the NI Pension Centre.)
You’ll also need to do this if you’ve already started to receive your state pension and now want to stop taking it for a time.
Protests about state pension changes by women
In recent years millions of women have protested about changes to the state pension. The state pension age is no longer 60 for women. It is now increasing in stages, alongside men, until it has reached 68. The increases have been controversial. Campaigners claim women born in the 1950s have been treated unfairly by rapid changes and the way they were communicated to those affected.
Many thousands said they had no idea they would have to wait longer to receive their state pension, and had suffered financial and emotional distress as a result. The government’s next review of state pension age is due by July 2023.
Are you approaching your retirement?
If you are approaching your retirement, this is the time you should obtain professional financial advice to discuss whether deferment is worth considering for your own personal circumstances. To find out more please contact us.
Author: Adam Reeves
DipPFS Cert CII (MP&ER)
Independent Financial Planner, Wealth Manager, Director
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