There aren’t many good deals available in the UK when it comes to pensions. That’s why we have long rather liked the idea of deferring your state pension. Why? Because if you do, you can make rather a nice return.
There are two ways of deferring. You can defer for up to five years and then get your money paid out as a lump sum, plus compound interest of 2% over the base rate. This is a perfectly good return relative to those available elsewhere on cash, at the moment, and it is also an effective way to force yourself to save cash at a guaranteed rate of return.
However, the more interesting choice is to take an uplift in your later pension payouts instead of a lump sum. This is much more generous: for every five weeks you delay getting your pension, payment goes up by 1%. So if you delay for one year, your payment in every subsequent year will be 10.4% higher.
That means a rise in your payout from £113.10 a week to £124.86 a week. Delay for five years and you would give up a total of £29,406 in pension. But live for 15 years after that and your overall gain would be almost £16,500. That’s a fine return on what, for many people – those with savings or those who carry on working past 65 – will be only a small sacrifice.
Clearly this isn’t worth doing if you are in bad health and aren’t convinced you will live out the necessary number of years, but if you are thinking of doing it, now’s the time to think about it.
From 2016, when the new flat-rate pension is introduced, the government is planning to slash the rate at which it increases deferred pensions. The new rate of increase will be 5.8%, taking your £113.10 to a mere £119.66 after one year. The result? You’ll need to live for almost 19 years after starting to draw your deferred pension to break-even.
This could still be worth it for someone in good health with substantial private savings or who plans to carry on working. But there probably aren’t many of us who are prepared to gamble a year of income on the likelihood of living for nearly 20 years post-retirement. After all, the statistics tell us that a healthy 65-year-old man can generally only expect to live another 18 years.
So think about deferring if you are reaching state retirement age before April 2016, since 10.4% is an incredibly generous return. But however nice a higher guaranteed income might sound for your later old age, it probably isn’t worth bothering with it after that. Better, should you not need your state pension, to take it anyway and pop it into a Nisa.