Can deferring the State Pension boost your annual income by £1,600?


Older couple hugging in park

Putting off taking your State Pension could boost your retirement income by thousands of pounds, according to investment giant Fidelity.

It is advising clients with smaller pension pots - of say £50,000 - to spend their savings before claiming their State Pension benefits.

How can deferring your State Pension make you richer in retirement?
People who put off taking their State Pension are rewarded with generous bonuses - the government increases the pension you receive by 10.4% for every year you defer.

So say you had a basic and second State Pension entitlement of £7,000, waiting for about four years before claiming it would up the amount you receive to £9,700 a year (or around £11,000 if inflation is at 3.5% during that time).

According to the Daily Mail, Fidelity is therefore urging people with modest pension pots on the verge of retirement to consider taking advantage of this by spending all their savings in the first few years and only taking their State Pensions when their private pension pots have run out.

How exactly would someone with a £50,000 pension gain?
You can take 25% of your pensions savings as a tax-free lump sum.

So someone with a £50,000 fund (who wanted to do this) would be left with £37,500, with which he or she could buy a guaranteed, inflation-protected annuity paying out about £1,400 a year, Fidelity's figures show.

Added to a State Pension entitlement of £7,000, this would provide an annual income of £8,400 (rising to about £9,700 after four years, assuming inflation at 3.5%).

However, if the same person took a £9,700 income directly from his or her pension pot at the current State Pension age (65 for a man or 63 for a woman), he or she could enjoy a higher income during the first four years as a result of their own savings, and then receive a higher State Pension - of up to about £11,000 a year - after that point.

And his or her annual income would be about £1,600 higher as a result.

Are there any catches?
The big drawback with this pension trick is that it will only work for people who retire before the new flat-rate State Pension is introduced in April 2016.

In other words, it is limited to men who were 63 and women who were 61 in April this year, as anyone under that age will not benefit from the same deferral bonuses.

It is also only suitable for people seeking a guaranteed retirement income, rather than the freedom to make withdrawals from their pension pots as and when they need the cash.

And anyone trying to work out how much they can spend each year to take advantage of the State Pension bonuses risks leaving themselves short should they end up overspending.

The advice service Just Retirement agrees that deferring the State Pension can prove beneficial for some people. "Timing can play a big part in the income you will receive when you retire," it said.

However, it recommends contacting a financial adviser before taking any decisions.