Flexible retirement - State pension deferral
I donít know if you know it or not, but the Department for Work and Pensions (DWP) has just published its Five Year Strategy. I mention it because, quite apart from the reassurance of knowing the DWP has a strategy it details exactly how the voluntary deferral of the Basic State Pension (BSP) will work in practice.
Changes to what we can do when we defer taking the BSP is something you may remember as one of the reforms set out in the Pensions Act 2004. This will come in from April this year (2005). For the first time, people will now be able to get the value of the deferred pension either as an increased pension payable from a later date, or as a lump sum. This will give many older people in the future a real chance of putting together sizeable piles of cash which, of course, could come in quite handy later in life. To put some scale on that, an average person who chooses to defer their BSP for five years would get a taxable wedge of something like £20,000 - £30,000 to sail off into the sunset with. Also remember that itís not necessary to carry on working in order to defer drawing the BSP.
Government statistics show that over a million people have already chosen to carry on working past State Pension Age and one of the aims of this reform is to recognise this and to add extra encouragement to others considering it. Iím not sure whether itís true that people are working on for the love of it or not, but a report from the Institute of Directors (IoD) last week calling for an end to mandatory retirement ages seemed to agree with this. Indeed, the IoD reports that most employers expect the average effective age of retirement to increase over the next two decades. The effective average retirement ages today are 64 for men and 61 for women and only 20% of the employers surveyed thought that would remain the case in the future.
For my part I see this as yet another interesting option that is now on the table for reasonably well-off people with good private pensions to defer taking their State pension for a while and put together a cash sum instead. Thatís a good option for loads of reasons and a good reason for advisers to talk more widely about their clientsí pension options in future. Itís good to talk!
Anyway, the Five Year Strategy set out details of what lump sum a person could expect to receive if they deferred a State pension of £105 for anytime over one year:
- £5,646 for one year
- £11,673 for two years
- £32,306 for five years
- £77,090 for ten years
Those who choose to defer can instead receive it as an increased weekly amount added to their pension when they finally claim. Someone with a full Basic State Pension at this April's rate of £82.05 will be able to get a weekly pension of:
- £90.58 if they defer for one year
- £99.12 if they defer for two years
- £107.65 if they defer for three years
- £116.18 if they defer for four years
- £124.72 if they defer for five years
This is all pretty interesting stuff and any of you who want to read more widely on it and the rest of the DWPís strategy can get a copy of the Five Year Strategy from the DWP website by following the link below:
DWP - Five Year Strategy
Also, anyone wanting to get the full SP on the practical side of things can follow the next link to a handy downloadable pamphlet snappily entitled ďYour State Pension Choice Ė Pension now or extra pension later: An Introduction to State Pension Deferral.Ē
Pension now or extra pension later: An Introduction to State Pension Deferral
These are the glory days of pensions for sure. Thingsíll never get any better than this. I mean, thereís something new coming out every day isnít there?
8 February 2005
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