Take pension now or wait?

Nigh

I'm past retirement age by a couple of years but still working full time. I get a reasonable salary, mortgage is paid off, no debts so I don't need extra money. I've deferred taking my state pension for now & I'm aware that the pension increases slightly for each year of deferral.
My question is, would is be more sensible to take the state pension now (about £10k/year) & add the extra income to my savings? I assume that I would have to pay tax on the £10k, probably at 40%, but would having the cash in savings be better than any gain from deferring?

enthusiasticsaver

As I understand it your state pension increases by 1% for each 9 week period you delay taking it so over 52 weeks or a year you would get a 5.8% increase. You won't get anywhere near that in savings rates so I would not take it if you are still working and don't need it and definitely not if it moves you into 40% tax rate.

Nigh

That makes some sense. What I had trouble getting my head around was he difference between the 5.8% uplift & lumping the income in with my current savings at probably 1% but sitting there for maybe 5 years. I guess the 5.8%/year is also cumulative year on year. Is there an upper limit to the pension uplift? If there is, it might be worth me taking the pension if I hit that limit.

Lorian

What pension contributions do you make to your company scheme, and what sort of scheme?

You need to try to mitigate the tax if you take it.

enthusiasticsaver

Nigh wrote: »

That makes some sense. What I had trouble getting my head around was he difference between the 5.8% uplift & lumping the income in with my current savings at probably 1% but sitting there for maybe 5 years. I guess the 5.8%/year is also cumulative year on year. Is there an upper limit to the pension uplift? If there is, it might be worth me taking the pension if I hit that limit.

I am not sure if there is an upper limit. No mention of it on government gateway site. That assumes your state pension retirement date was after April 2016. If it was before that I think the rates are even more favourable in that you get a 1% uplift for every 5 weeks or you can get a one off lump sum when you claim.

This assumes of course you will not be claiming any benefits. If you will that might put a different slant on things as the higher weekly payments may exclude you from certain benefits. You also should look at your company scheme as it might be worth overpaying on that instead and claiming the state pension now.

LHW99

I am not sure if there is an upper limit. No mention of it on government gateway site. That assumes your state pension retirement date was after April 2016.

But there must be a point at which the number of likely years of life left becomes sufficiently short that you could end up not benefitting from the increased annual amount?

Paul_Herring

Bear in mind that while you're getting 5.8% uplift per year, you're foregoing the actual pension for that year, which needs a certain amount of time once you start claiming it to recoup/clawback (1/5.8%=17 years, to be overly simplistic. )

enthusiasticsaver

LHW99 wrote: »

But there must be a point at which the number of likely years of life left becomes sufficiently short that you could end up not benefitting from the increased annual amount?

I guess that is always the gamble. Personally if there are any health concerns or worries about decreased longevity it would make sense to take it. Presumably as the OP is still working full time and not worrying about finances he or she is in good health. Paul Herring makes a good point about you not having the actual pension of £10k per year but if 40% of it goes in tax and the remainder languishes at 0.5% interest it makes sense to defer. The alternative is to actually divert an additional £10k or £12.5k with additional tax to your company pension so keeping you under the HR threshold and claim the state pension now.

Paul_Herring

but if 40% of it goes in tax and the remainder languishes at 0.5% interest it makes sense to defer.

Hence the balancing act... and as any actuary will tell you, finding the breakeven point for a cohort is easy. Working it out for one particular member of it; not so much.

jamesd

No limit on the uplift. The increase is 5.8% a year not compounded, so five years is 5 * 5.8%. You do get the underlying annual increases added each year.

nigelbb

enthusiasticsaver wrote: »

Paul Herring makes a good point about you not having the actual pension of £10k per year but if 40% of it goes in tax and the remainder languishes at 0.5% interest it makes sense to defer. The alternative is to actually divert an additional £10k or £12.5k with additional tax to your company pension so keeping you under the HR threshold and claim the state pension now.

Claiming the state pension & paying it all into your company pension makes the most sense. There will be no tax to pay & when you eventually retire you will be able to take 25% of the money tax free. There is nothing to be gained by deferment in fact you can only lose.