Why it could pay to delay your retirement

After working for several decades, you may be looking forward to retiring so you can hit the golf course or travel the world. Staying at work a little longer might be the last thing on your mind. However, it is becoming increasingly common for people to defer their retirement.

At present, experts believe that around one in ten people don’t retire at the age of 65. This figure is set to rise, with a third of people in their 50s expecting that they will carry on working beyond the official retirement age.

Part of this may be due to low interest rates and the closure of the remaining defined-benefit schemes, which mean that many people face a lower income than they anticipated and can’t afford to retire. But there’s also a positive case for carrying on in any case.

Evidence suggests that a few additional years of work could end up substantially boosting the size of your retirement savings. Pensions expert Dr Ros Altmann has worked out that someone earning £23,075 a year who has a pension pot of £100,000 could see it rise by over 10%, if they worked another year full-time and then went part-time for another two years.

If they stayed on for two years full-time and then three years part-time, this would boost their pot by a quarter. This may not seem much. However, at a drawdown rate of £5,000 a year, it would mean that a pension pot would last for 44 years, rather than 30.

It’s not just private pensions that could be affected by this. Deferring the state pension can also be a good idea. For every five weeks you don’t take the state pension, it goes up by 1%. This means that waiting one year could boost the annual amount by over 10% from £5,881 a year to nearly £6,500.

Indeed, this scheme is so generous that the government has been forced to scale it back. From 2016 the boost will be only 0.5% for every five weeks deferred.

If you’re not particularly interested in a higher annual payment, the government will give you a lump sum. This will be equivalent to the pension you would have received, plus interest paid at an annual rate of 2% over the base rate.

However, this sum will be treated as income for tax purposes, which means that you may end up having to pay a high marginal rate.

Research also suggests that working for longer has benefits that stretch beyond a fatter wallet. Doctors have long recognised that being active can delay the effects of ageing.

Last year INSERM, the main French medical research agency, published conclusive evidence supporting this theory. Its study found that for every year workers delayed retirement, their risk of getting dementia fell by 3.2%.

  • jimtaylor

    Conversely, if the pension income is adequate it may be better to take it as early as possible and for as long as possible, because the end point is the same (even though unknown) in both scenarios.