Times are tough for anyone looking for a decent income in retirement. But there is one small way to give your pension a nice boost that most people completely miss. It is to delay taking your state pension. Over 90% of those entitled to a state pension start drawing it the second they can. On the surface, this makes complete sense. After all, if you think you have been paying into a system for 40 years, you want to get as much out as you can.
But it could be a mistake. Why? Because the longer you can bring yourself to wait, the higher your eventual pension will be. For every five weeks you delay, your payment will go up by 1.01%. Put it off for a year, and you will get an extra 10.4% a week until you die. Go further, says Norma Cohen in the Financial Times, delay taking it from 65 to 70, and you do rather better.
A simple rule of thumb is to assume that for each year you defer, you get an extra £1 a week for every £10 of pension. So if you are entitled to the full state pension of around £110 a week at 65, and defer it for five years, you will get the inflation-linked equivalent of £165 a week. That's a 50% rise. You will have given up around £28,600 in pension payments over the five years. But if you live for another 15 years you will have more than compensated yourself: you'll have been paid out an extra £44,600.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
There's more. You don't have to take this benefit as income. Should you feel so inclined, you can take it as a lump sum made up of all the income you would have received, plus interest of "at least" 2% above the Bank of England base rate (so 2.5%). That's not great (taking the increased pension is probably a better bet), but it's more than you get on most savings accounts, so it isn't bad either.
What if you are already claiming your state pension? This seems amazing, but according to www.direct.gov.uk, you can stop claiming for a while so as to get the deferral benefits and "build up more money for the future". You might think it is yet another example of the government trying to cut short-term spending, but increasing its long-term liabilities in the process. You would be right. So much so that the government now plans to change the rules.
From 2016, each five-week deferral will raise your payment by only 0.5%. That won't make it so worthwhile. You might also bear in mind that deferring isn't entirely risk-free if you die young, you may well not get back the full amount you have deferred. Anyone following the example above (entitled to £110 and deferring for five years) would need to live to 80 to break-even.
