Delay Or Not? The State Pension Dilemma

When to draw on a pension is one of the biggest dilemmas facing those approaching retirement.

As people decide to work longer to replenish depleted retirement savings, one question is whether to delay taking the State Pension.

Consumer group Which? has recently investigated whether opting to skip drawing the state pension is worthwhile.

The deal with the government is if you can draw your pension but can afford not to take the cash, you can pick up guaranteed growth

The question Which? asked though is whether this pays.

The rules

The rules allow anyone of State Pension age to defer the payments – but only once and the whole amount must be left alone.

The current rules say your state pension will increase by 1% for every five weeks of deferral – so a year is 10 blocks of 1% or a 10.4% return.

For example, someone reaching state pension age in the next six months expecting the average pension payment of £121.35 a week would receive an extra £1,969 a year, pushing their payment up to just over £159 a week.

Investing the money in even the best paying high street savings account would barely keep pace with inflation, which is running at 2.7%, according to September’s official figures.

As an extra bonus, the deferred amount and the extra payment is index linked.

Like all retirement saving, deferring the state pension is a gamble against life expectancy.

Winners and losers

To win the deferment gamble, a state pension would have to live to at least 79 years old, or would see no real gain in the strategy, says Which?

The average life expectancy for men is 87 years and around 89 years for women, according to the Office of National Statistics, but that’s an average and means a lot of people die at younger age and some soldier on well into their hundreds.

On top of that, the rules are due to change in 2016, when the flat rate state pension comes in and the deferral rate slumps to 5% a year to save the government money.

“You can win on deferring the state pension if you pick the right option,” said a Which? spokesman. “The winners tend to be those who collect the bonus as a weekly top-up rather than a lump sum, which turns out around about the same as what a bank would have paid once adjusted for inflation.”

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