Delaying a state pension: Steve Webb’s five golden rules

Many people choose to postpone their state pension in exchange for higher benefits later in retirement.

Some also do so by accident, by not submitting an application in time when they turn 66. If you do nothing, your state pension will automatically be postponed.

Deferring can be beneficial, especially if you’re still earning a salary and want to avoid your state pension – worth £9,600 a year at the full rate – running up your income tax bill.

But there are traps for the unwary, especially those who don’t realize that the ability to receive all your unclaimed payments in a tidy lump sum (plus interest) was abolished in April 2016.

Our terrified uncle and former pensions minister, Steve Webb, regularly hears of younger retirees who would accidentally receive a large sum of money when they finally filed a claim.

They are shocked to discover that they will only receive higher state pensions in the future.

And to add to the confusion, there is still an option open to them to reverse their claim for 12 months in exchange for a lump sum payment (but no interest) for that period only.

Below we explain the pre- and post-2016 systems for deferring the state pension. And Steve Webb, now a partner at LCP, offers his five golden rules for maximizing your chances of taking advantage of a slowdown.

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Savers who reached state pension age and deferred before April 2016

Many people who applied for a deferment before April 6, 2016 have already applied for their state pension, but we often hear from those who have not yet done so.

If you are in this situation, under the old rules you still have the choice of a lump sum plus interest, or a higher AOW with an extra 10.4 percent for each deferral year.

Savers who reached state pension age and postponed after April 2016

Since 6 April 2016, the possibility of a lump sum payment has expired and you will receive a less generous surcharge of 5.8 percent on your payments for each deferral year.

But as mentioned above, you can choose to retroactively file your claim one year and receive a lump sum for that period.

You lose the 5.8 percent increase for the retroactive period and it will only be applied to the balance of the time you deferred.

Another thing to keep in mind is that under the new system, if you defer and die before applying, your beneficiaries will only receive three months of retroactive state pension. Under the pre-2016 system, they could get the lump sum.

Steve Webb warned about this after receiving a question in his This is Money column from a bereaved family who had missed.

What many people also don’t know is that you can stop your state pension once you’ve started recording, if you want to, but you can only do that once.

Steve Webb explains how you can make retirement benefits work for you

1. As many readers have discovered through painful experience, you risk incurring delays and hassles if you do anything that isn’t easy when taking your state pension (other than applying for it on time). few months delay.

2. Broadly speaking, a deferral is meant to be a ‘fair deal’ where the government generally neither wins nor loses; but some people will tend to gain if they procrastinate and others will tend to lose.

For example, if you are in good health and have a long retirement, you will probably benefit because your increased pension will last for a long time. Conversely, if you are in poor health, you may not get back the money you missed due to a delay.

3. For those who reached retirement age before 2016, there used to be the choice to take the fruits of the deferment in the form of an increased state pension or a lump sum, but under the new system you will in principle receive a higher pension at an additional rate of 5.8 percent for each year of deferral.

The only exception to this is that you can retroactively collect your claim up to 12 months and collect a fixed amount for that period; no interest is charged on this lump sum.

4. You can’t use a deferral to get low-income benefits. If you postpone your retirement and try to apply for a pension credit, you will still be treated as if you had applied for your pension.

5. A possible advantage of deferral is if you are still working, especially if you have a relatively high income. Your tax-free personal allowance is likely to be depleted by your wages, so your state pension will be fully taxed from the first pound.

If this puts you in higher tax brackets, you could pay 40 percent or more on part of your state pension. By delaying to a point where you no longer have any income, you can avoid this risk.

>> Read Steve Webb’s most popular columns on state pensions