Deferring State pension after one year.

sebastianj

Dear all,
Any pitfalls? Planning a holiday in two years, money could come handy.
thanx
Sebastian

jamesd

After one year of what? What money could come in handy?

If you have claimed your state pension you're allowed to defer exactly once more in your life. Lump sum or higher income can be taken when you decide to stop deferring. Lump sum is usually the worst deal, higher income and borrowing is likely to beat it if you happen to want to fund something that takes a lump sum. depends on how cheaply you can borrow.

sebastianj

Many thanks Jamesd, I was under the impession that after one year, I could claim it all back, does this class as lump sum? I am aware that lump sum is Taxed heavily which is not my intention. Night before there was a program on LBC and the guy almost recommended it.

seb

jamesd

Yes, if you just want it all it's a lump sum. The lump sum from deferring the state pension isn't taxed heavily, though. It's taxed at the highest rate you already pay tax at, instead of being added to your taxable income.

Just know that taking the lump sum after deferring is a bad idea. Better to take the higher income unless your health is poor. Then use the higher income to pay for a loan if you need one. The income will be for your whole life while the loan is just short term.

sebastianj

Thanks, this is what I don't understand, why is it a bad idea to take a lump sum after deferring. Will I be taxed more? For example, if I take the lump sum after two years, does the whole amount get added to my yearly income and push me into even higher Tax?
seb

Jaycee_Dove

It is only a bad idea because the total amount you get as a lump sum is less generous than it would be if you took it as an extra amount on your pension every week.


In several years of taking these extra weekly payments you will overtake the amount you would get as a lump sum. And as you keep on getting it every week as long as you live then you could be tens of thousands better off in the long term.


But, of course, you gamble on living long enough to be in profit. But if the odds of this are good (ie relatively young and in good health) you probably would be better off (possibly a lot better off) taking the extra per week and using that to pay off a short term loan rather than use the lump sum to pay instead.


Only your personal circumstances can let you choose. But the current rate you get extra per week on your pension by deferring is incredibly generous. It will be nothing like as generous for those getting the new 'flat rate' pension after 2016 and deciding to defer that.


So as a rule if the extra per week is worth considering if you tick the boxes to make the gamble worthwhile.

jamesd

The lump sum from deferring the state pension is never added to your income to increase your tax rate. It's taxed at your existing tax rate.

The lump sum is a bad idea because it is worth less than the increase in the state pension. The lump sum is just the delayed state pension payments plus a low rate of interest. The higher income is a 10.4% increase in your state pension for life for each year you defer, increasing with inflation.

Say your state pension is £8,000. The lump sum after one year would be around £8,200. The increase in state pension would be £832 a year. Doesn't take long for £832 increasing with inflation to be more than £8,200.

For those who reach state pension age from 6 April 2016 there's no lump sum option and the increased amount is 5.8% a year.

sebastianj

Many thanks, I did not know any of this, on the Pensions Website, they state that you will get the lump sum +25%, considering this, it could by worthwhile, as touch wood, I am fit and healthy at the present. But it seems I have misunderstood the statement, will check again tomorrow, thanks for the help.

sebastian.

Mojisola

sebastianj wrote: »

Dear all,
Any pitfalls? Planning a holiday in two years, money could come handy.

Couldn't you keep taking your pension but put it in a savings account for the big holiday?

jamesd

sebastianj wrote: »

on the Pensions Website, they state that you will get the lump sum +25%

You might want to check that again, I think you'll find that it says 2.5%, not 25%. Deferring and taking the higher income is one of the best savings/investment deals there is.

Oblivion

jamesd wrote: »

You might want to check that again, I think you'll find that it says 2.5%, not 25%. Deferring and taking the higher income is one of the best savings/investment deals there is.

I agree and this is what my wife is thinking of doing ... her SPA is in November this year. However, she is already in receipt of a teachers pension which is a contracted out scheme and we haven't been able find out the answer to one very important question.

If she were to take her state pension at SPA we would expect the Teacher's Pension to stop paying the GMP element and for the state pension to pay it instead. But what happens if she defers claiming state pension ... will the Teacher's Pension still stop payment of the GMP element at SPA even though there will be no state pension to cover it?

We've written to TP but they are simply ignoring us.