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Hot Topic – State Pension Deferral and 2016

Hot Topic – State Pension Deferral and 2016

Hot TopicAfter the State pension deferral question came up in R06 in July, it would have prompted those sitting the exam to do a bit of research on how it works.

At the moment, if someone defers their State pension they have two options:

Option 1

  • If a client defers for at least 5 weeks they are entitled to an extra 1% in the weekly amount for every 5 weeks they put off claiming.
  • This works out at about 10.4% extra pension for every full year deferred.
  • The extra amount is paid with the normal State pension once they start to claim.
  • It is taxed as taxable income as normal.
  • If someone defers for 4 years they could add 41.6% onto today’s pension.

Option 2

  • If the same client puts off claiming for at least 12 months, they can receive a one-off taxable lump sum plus the normal State pension at the usual rate.
  • The lump sum is based on the normal weekly amount they would have received plus interest calculated as 2% above the Bank of England base rate.
  • The lump sum does not change that person’s income tax rate – if they are a non-taxpayer they will not pay tax on the lump sum even if that lump sum pushed them over their personal allowance.

Anyone can put off taking their State pension.  Whether it is better to take an increased income or the lump sum will entirely depend on circumstances and interest rates.  In the future however, there won’t be this choice.

It has been confirmed that the lump sum option will disappear from April 2016.  Furthermore the future increase rate for deferring is up in the air too although the Pensions Minister has said that 5% would be a more appropriate figure (half the current rate).

Interestingly he was also quoted as saying that ‘the vast majority of people draw their State pension on time’ and I can’t say that surprises me.  A lot of people may not know they can defer it but most wouldn’t want to anyway.

For more help with your Pensions studies go to: – for CF4 – for R04 – for J05 – for AF3