Pension lump sum is a false friend

Pensioner's handOlder Britons are being urged to think twice before choosing to delay taking their pensions in return for a lump sum payment when they do retire.

Unfortunately, though, it is already too late for the thousands of older people who have put off claiming their state pensions and have received cash payments from the government in return for a lower income.

Every year, around 66,000 people delay claiming a pension, usually because they are working and do not need the money.

The deal they signed up to is for the government to offer them a lump sum payment or a more generous pension when they do retire - in return for the lost income.

However, while two-thirds of people opt for the lump sum, pensions experts warn that this can be a costly mistake.

And this is particularly true if they live for a long time after retiring. To illustrate this, take someone who would get £100 a week from the state pension, but defers claiming for five years. He or she would miss out on a massive £26,000 of income.

Not such a hardship when he or she could get a lump sum of £27,680 from the government, you might think. However, the other option is to receive an additional £52 a week income until they die - pushing the total income they receive up by £2,704 a year.

Consequently, if he or she lived for more than 10 years after retirement, the income option would be by far the better choice - even though the lump sum payment may seem more attractive on paper.

Anyone thinking about delaying their state pensions payments would therefore be wise to take independent financial advice as the right decision will depend on their individual circumstances.
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