Money helpdesk - Is it better to take my pension now or delay retirement?

Published on Saturday 12 April 2008 15:07

I AM nearing my 65th birthday, and so will be eligible to draw my state pension soon, but I have been wondering what I should do, as I work for myself and had planned to continue working for a few years yet.

I could take my pension immediately, but I have heard there is also the option to defer taking it for a few years. If I do delay, is it correct that I could qualify for an additional pension or a lump sum to compensate for the delay?

What is my best course of action? Should I take the pension immediately, or defer it for a lump sum? Or could I defer it for an increased income?

I would be grateful if you could explain what the advantages and disadvantages of delaying might be.

RW, by e-mail

Tom McPhail, Hargreaves Lansdown's head of pensions research, writes:

IF YOU decide to defer taking your state benefits when they become due, then the enhanced terms on offer from the DWP are uncharacteristically generous.

The Government is really quite keen for us to work later, or at least to not draw our pensions if we don't need to, and so is willing to reward us for playing along. This is reflected in the fact that retirement ages will be creeping up over the next 40 years, and by the middle of this century the retirement age for men and women will have risen to 68.

There used to be a time limit for deferring the state pension of a maximum of five years, but this has now been abolished, meaning that you can defer for as long as you like and continue earning extra benefit for it.

If you choose to delay, then you can either enjoy an enhanced pension when you take it or an additional lump sum. The lump sum is the more straightforward of the two options. The deferred income is rolled up at a rate of bank base plus 2%, and paid to you in one go. If you compare that with the alternative of drawing your state pension and paying it into a deposit savings account then you would almost certainly not achieve a comparable rate of return. To take the lump sum, you must defer for at least 12 months.

If instead you opt for a higher income after deferral, then the state pension will be increased at a rate of 10.4% for every year that you defer. The minimum period for deferring is just five weeks, so this is a more flexible option.

Is this a good deal? After five years, the deferred basic state pension will be nearly 50% higher than the non-deferred pension. Taking this as an example, you would then need to live for another nine to 10 years, or to 80, to pass the break-even point. Rapidly rising life expectancy is likely to see many people reaching this milestone. So for most people in reasonable health, the deferred income will pay for itself.

If you do die while in deferral then, provided you have an eligible spouse or partner who is over state pension age at the time of your death, they should benefit from your deferral.

The bottom line is that the terms for deferral are pretty fair, and are if anything weighted in favour of deferral. For most people, I think the answer is to do whatever will suit your personal needs best. If you need the income now, then take it. If you are happy to wait, then you won't lose by delaying.