There are already 12.6 million adults claiming the State Pension and the Baby Boomer wave of 1946 to 1964 still due to collect this, won’t end for another 10 years.
Every year in the UK tens of thousands of people reach their state pension age. You may be one of them. Depending upon your own unique National Insurance Contribution (NIC) record, you will face the choice of taking benefits straight away or delaying them in return for an increased pension later.
This article covers the advantages and disadvantages of that decision. Is it better to take the money now, or delay for more money later on?
The main concerns regarding this question are the unknowns, such as how long one would be living for in retirement, and in what state of enjoyment and health.
According to the Department for Work and Pensions (DWP), as of September 2019, 8% of all pensioners (988,400) were eligible for an increment (a lump sum or an enhanced pension based on delaying their claim). That is almost one million pensioners. Did they all make the right decision?
A rational or emotional choice
There are two ways to consider the options. A reasoned, logical, and grounded decision based on the numbers or one based on passion, gut instinct, and temperament - the head or the heart.
Many people believe that the greater community, the herd, come to the right decision. Based on the evidence above, 92% of pensioners, an overwhelming majority, chose not to delay their pension. The question remains however, were they well informed?
Is the delay worth the money?
To answer this question one must look at motivation. Why are the government willing to offer an incentive to delay taking the pension? What’s in it for the state?
Take a simplified example. If in one year 50,000 people delayed their state pension (assume for the example the state pension is £10,000), the unpaid pensions for one year comes to £500 million.
Delaying the pension won’t make you live any longer. The two factors are unconnected. By delaying for one year, you are likely to earn your state pension for one year less, all other variables considered.
You can find your statistical life expectancy here. A female aged 65 has an average life expectancy of 87, a further 22 years. She also still has a 25% chance of reaching the age of 94, as well as a 5% chance of reaching 100. As the saying goes, “life is a lottery”.
The House of Commons Library Briefing Paper 2868 from May 2020 showed that of those pensioners who delayed, of the highest categories, 20% lived abroad and 10% lived in London. It also showed that the number of people delaying is falling gradually, with 8% delaying in 2019 compared to 11% in 2004.
What other factors are important?
In order to make an informed decision one must consider all potentially influential factors.
Data shows that parental influence can be considerable. This is not just from the obvious genetic link (a survey by Calico and Ancestry of 54 million family trees put genetics at 7% for your life-span), but also in relation to more social aspects such as education, housing, access to health care, and income, which also play a large part.
It is also observed that in the UK, where you live or have been brought up also exacts influence, while what family income group you belong to is also important. The discrepancies can be significant. The regional differences can be seen here, and the income data here.
According to The Health Foundation in February 2020, “Regional differences in health are large and growing. There is an 18.6 year gap in male healthy life expectancy at birth between local areas in the UK.”
It is getting complicated; I thought it would be easy
You are now aware of several important factors:
- Your current health, fitness and diet
- Your age and gender
- The longevity of your parents
- The social and economic standing of your parents and family
- The region where you were raised and live
- Your family income
- The relevance of the state pension to your other retirement income sources
- Your choice of spouse or partner
It is no longer a simple binary choice.
What is on offer?
Here is what is currently on offer.
You need to claim your state pension because the default is to defer (delay). You will get a letter several weeks before your state pension age (SPA). You can find your SPA here. Do not sleepwalk into retirement.
The information is based on reaching your SPA after 6th April 2016.
The minimum delay period is nine weeks, and after that the state pension increases by about 5.8% for every 52 weeks of delay.
Please be aware that your state pension is linked and capped by some other state benefits you receive, so take care when trying to calculate it all. State pensions are taxed as earned income.
You can continue to work after your SPA and still claim or delay your pension. You will save on NIC’s as well.
The new full State Pension is £175.20 pw (£9,110 a year) and depends on your NIC record.
The new State Pension increases each year by whichever of the following is the highest (called the Triple-Lock):
- Earnings – the average percentage growth in wages (in Great Britain)
- Prices – the percentage growth in prices in the UK as measured by the Consumer Price Index (CPI)
Some worked examples
The first example is a 65-year old female, with a life expectancy of 87 years. We will ignore inflation and state pension Triple-Lock increases for now.
Option A is to take the full pension straight away. £9,110 every year over 22 years comes to £200,420.
Option B is to delay for five years. The indexed annual pension is now £12,077 every year for 17 years. This comes to £205,303.
The delay has produced a marginal gain of £4,883 over 22 years.
Another way to look at this is that in Option B, the pensioner (when likely fitter and more socially active) lost out on £45,550 between 65 and 70, only to make it up when older.
In the second example we consider a 65-year old male. He has an average life expectancy of 85 years, but is lucky and reaches the age of 92 (a 25% chance).
Option A is the same as in the first example and provides the same outcome.
Option B is also the same as in the first example – delaying for five years. The man would enjoy £12,077 a year for 22 years, totalling £265,694. That’s a clear benefit, but again, the state pension is back-loaded.
It is also unknown as to whether future governments will maintain, cut, increase, or means test the State Pension.
It pays to think twice and consider your options carefully. If you need a second opinion, call one of our experts.