How do I end state pension deferral after two years?

I am writing to ask for your help, advice and guidance in postponing the AOW.

In short, I reached state pension age two years ago and postponed my pension. I am now finally at the stage to access my AOW.

I have been in constant telephone contact with the Department of Work and Pensions since May to request confirmation of the exact details of what my pension would be, a simple question to ask, but I was given conflicting information from each of the advisers I spoke to.

I was given the following information: The actual amount payable for the first year of deferral is £10,000 (minus 20 percent tax) plus 2 percent interest.

For the second year of deferral, the amount due would be included in the actual AOW as an additional amount.

I have been in touch again with the DWP who now informs me that on my application form I need to push my pension application back to the first year – 2021.

The second year does not count towards compensation for an extra amount that must be included in the actual AOW.

I spin in circles and get nowhere fast. I also visited the gov.uk website for clarification but found only basic information.

I am confused to say the least. I would be very grateful if you could shed some light on this.

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Steve Webb replies: I can totally understand why you’re confused, and some of the information you’ve been given just sounds incorrect.

Until the new state pension system was introduced in April 2016, people who postponed taking their state pension could be rewarded in two ways if they eventually made a claim.

Or they could get a lump sum (plus a little interest) to cover all the retirement payments they missed, or they could get a permanently increased level of pension instead.

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For those, like you, who have reached the state pension age after 5 April 2016, the lump sum has been deleted.

Instead, people who postpone taking their state pension simply get a permanently higher rate when they finally withdraw their pension.

Now you get an extra 5.8 percent on your pension for every full year you defer.

However, there is still a way to get a lump sum for part of the deferral period and that is what you are offered.

What DWP proposes to you is that you can submit your AOW application *with retroactive effect*.

Although you are filing a claim now, you can request that your claim expires retroactively for up to one year.

Any money owed to you between the date you filed your claim and today’s date will simply be paid in one lump sum (but with no interest).

Assuming it’s been exactly two years since you reached retirement age, they suggest that you should retroactively repay your claim up to the maximum allowed, which is one year.

You will then be treated as if you had been granted a one-year extension (from 2020 to 2021) – and will therefore receive an extra 5.8 percent on your pension for the duration of your life.

Then they treat you as if you had actually claimed a year ago and only need to make up for the missing payments, which they do as a lump sum.

As you say, the lump sum is taxable at the income tax rate you currently pay.

So if you are subject to basic rate tax in the year in which you receive the lump sum payment, you will pay basic rate tax on the lump sum lump sum.

However, you may be given a choice of which year you want the lump sum included in, and this may be worth investigating if your tax rate is likely to differ between the two years.

Your main options here are either to go with what they propose and get a combination of a higher pension for a year of deferral and a modest lump sum, or alternatively to put today’s date on your pension application.

Then you will simply receive a further increased pension – increased by 11.6 percent in the event of a two-year postponement – ​​but no lump sum payment.

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