Should I defer my State Pension?

7th January 2019 | Posted in: Pensions, Savings & Investments, Planning defer state pension

It is stunning, but with around 330,000 people reaching state pension age each year, many lose out on their entitlement by making ill-informed choices based on their life expectancy.

In November 2018 the state pension age is equalised at 65 for men and women and will be 66 in October 2020, with potential further increases planned.

As you approach state pension age, the Department of Work and Pensions (DWP) will offer you the choice of increasing your weekly pension by deferring the date of commencement.

An increased state pension may appear to be attractive and according to DWP currently around one in nine people elect to defer, but the decision requires some careful consideration and frequently we are asked whether deferral is the right choice.

So, what is being offered and how do you make the decision?

Government finances are under pressure and demographic changes mean that the affordability of paying out future state pensions has lead to recent changes aimed at easing the commitment.

  • Previously, for those retiring before April 2016, deferral would increase the state pension by around 10.47% per annum.
  • Now, deferral increases pension by 5.8% per annum.
  • Moreover, the additional pension increase is not covered by the “triple lock” guarantee where the annual increase is the higher of inflation, average earnings or 2.5%.

Against this background, there are 2 factors that drive your decision, one more predictable than the other, namely life expectancy and marginal tax rates.

When considering life expectancy, the National Records of Scotland reported in September that the average life expectancy in Scotland for a 65-year-old person was 82.4 for males and 84.7 for females.

Under the old rules where 10.47% pension increase applied, the financial break-even point was survival for 9 years after state pension age. Under the new rules where around 5.8% increase applies, the breakeven point is extended to 17 years (i.e. to age 83 for those with state pension commencing at age 66)

Assuming no significant change in the interim, this would mean that anyone deferring their state pension until age 67 would have a break-even age of 84, which you will note was greater than the average life expectancy for males according to the statistics.

Accordingly, general guidance would be that only those who consider themselves in particularly good health should consider state pension deferral.

The caveat to health -based decision making is where pension income may be taxed at higher rates of tax. Depending on your mix of income (dividends, interest, earnings) there are a variety of marginal tax rates. Where there is a significant marginal rate increase by taking the state pension, the survival break-even point will be shortened, but only slightly.

Live long and prosper!

 

If you feel we could help you and would like to discuss any of the above, please contact David Guild MA on 0131 317 7377 or email to david.guild@jsca.co.uk.
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