{"id":9969,"date":"2020-08-17T09:25:43","date_gmt":"2020-08-17T08:25:43","guid":{"rendered":"https:\/\/www.bbtgroup.co.uk\/portfolio\/?p=9969"},"modified":"2021-08-19T13:53:40","modified_gmt":"2021-08-19T12:53:40","slug":"deferring-your-state-pension","status":"publish","type":"post","link":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/deferring-your-state-pension\/","title":{"rendered":"Deferring Your State Pension \u2013 A No-Brainer or a Gamble?"},"content":{"rendered":"

Financial Planner Simon Hartley breaks down what deferment could mean for you.<\/em><\/h3>\n

You may have heard that it\u2019s possible to defer your State Pension; either before you receive a penny of it, or, even if you\u2019ve been receiving it for years.<\/p>\n

\u201cWhy would anyone turn down free money?<\/em>\u201d I hear you scream...
\n<\/p>\n

<\/p>\n

Well, that\u2019s because having a little patience could save you paying a significant chunk of it back into Boris\u2019 coffers!<\/p>\n

\u201cAhhhhh\u2026<\/em>\u201d Indeed; but it\u2019s not necessarily the right option for everyone. Confused yet?<\/p>\n

Let\u2019s take John as an example: he\u2019s 66 and earns \u00a350,000 a year but doesn\u2019t want to retire until he\u2019s 70. At this point he is still a Basic Rate Taxpayer, but if he were to start taking his full \u2018new\u2019 State Pension of just over \u00a39,100 a year, this would push him into 40% Income Tax and he would therefore net just \u00a35,460 p.a. of his State Pension; losing him \u00a34,550. John may well be considering putting his State Pension on hold until his income drops.<\/p>\n

By deferring, John would avoid creeping into the Higher Rate tax bracket and increase his future government-backed pension by 5.8% a year for every 12 months\u2019 deferred (or 1% p.a. for every 9 weeks deferred).<\/p>\n

Assuming that John defers for four years until he retires at age 70, his State Pension would have increased to \u00a311,400 (\u00a39,120 p.a. after tax). In theory, he would be \u00a33,660 p.a. better off; not only has his pension increased, but by waiting until he\u2019s stopped working to draw it, he\u2019s also saved himself \u00a31,820 each year in Higher Rate Income Tax.<\/p>\n

Is John actually better off though? After all, he\u2019s missed out on four years of State Pension payments which, even after Higher Rate Tax, would have totalled \u00a321,840. Based on John drawing his increased pension from age 70, it would take him nearly six years to get this back and it would actually be 12 years before he broke even compared to drawing the pension from age 66 when it fell due. This would take him all the way to age 82. Of course, we have to factor in our own longevity. John\u2019s Life Expectancy at age 66, according to the Office of National Statistics, would be 85 (19 years). We need to live long enough to see the benefit as our State Pension unfortunately dies with us. The old adage \u2018a bird in the hand\u2026\u2019 springs to mind here.<\/p>\n

<\/p>\n

Since we never know what\u2019s around the corner, it might appear to John that he is better off simply taking the State Pension and incurring the Higher Rate tax bill, even though he doesn\u2019t need the income yet. Before deciding, John consults with Rachel - his Financial Planner - who agrees with John, but discusses a subtle but significant tweak to his plan. Rachel recommends that John draws the State Pension when due but re-invests the net amount into a Personal Pension until he retires.<\/p>\n

Personal pension contributions attract tax relief at your marginal rate, and so not only could the 40% tax be reclaimed, the funds would also immediately fall outside of your estate for Inheritance Tax purposes. You would then have the chance to take the funds back out at a more tax-efficient point in time, with the potential to have achieved some investment growth in the meantime. Food for thought.<\/p>\n

It\u2019s worth pointing out that if you reached State Pension Age before April 2016 then the deferral rates are more favourable - 1% p.a. for every five weeks deferred rather than nine. You also have the option of taking the increase as a lump sum when you start\/restart drawing your pension. This opens up a whole new world of financial planning opportunities (but that\u2019s for another article\u2026).<\/p>\n

State Pension Deferral can be an invaluable financial planning tool when utilised correctly, but be aware that there are restrictions and limitations. Obviously not everyone would be better off deferring the State Pension and we strongly suggest seeking independent advice before taking any action.<\/p>\n

<\/a><\/p>\n

Simon Hartley BA(Hons) DipPFS<\/strong>
\nFinancial Planner<\/strong><\/p>\n

\n

Read more of our articles about pensions here<\/a><\/em><\/strong><\/p>\n

Information is based on our current understanding of taxation, legislation, and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.<\/em><\/p>\n

Calculations for the new State Pension do not take account of any future indexation.<\/em><\/p>\n

A pension is a long-term investment - the fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.<\/em><\/p>\n

[1]Office of National Statistics<\/a> (Life Expectancy correct as at the time of writing)<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Financial Planner Simon Hartley breaks down what deferment could mean for you. You may have heard that it\u2019s possible to defer your State Pension; either before you receive a penny of it, or, even if you\u2019ve been receiving it for years. \u201cWhy would anyone turn down free money?\u201d I hear you scream…<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11,3],"tags":[],"class_list":["post-9969","post","type-post","status-publish","format-standard","hentry","category-adviser-article","category-pensions"],"_links":{"self":[{"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/posts\/9969","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/comments?post=9969"}],"version-history":[{"count":165,"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/posts\/9969\/revisions"}],"predecessor-version":[{"id":10936,"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/posts\/9969\/revisions\/10936"}],"wp:attachment":[{"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/media?parent=9969"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/categories?post=9969"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.bbtgroup.co.uk\/clientportfolio\/wp-json\/wp\/v2\/tags?post=9969"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}