Deferring the state pension by two years can boost extra income for retirees with sufficient resources by almost £19,000, analysis by Fidelity Worldwide Investment revealed, and this figure increases to over £40,000 if a seven-year deferral is taken.
A freedom of information request submitted by the firm to the Department for Work and Pensions found that for the six months to February 2014, just under 270,000 people started to draw state pensions.
Of this figure, only 23,000 people were deferring their benefits, while 247,000 (92 per cent) drew the pension immediately.
However, all retirees who reach or have already reached state pension age before the start of April 2016 can defer their pension, receiving a 1 per cent uplift to their income for every five weeks of deferral, amounting to a 10.4 per cent boost in state pension every year, Fidelity said.
To take advantage, a typical retiree needs £6,970 in private savings for each year they defer, which equates to what they would have received from the basic state pension had they claimed immediately.
A reasonable estimate is that around 60 per cent of the nation’s retirees have access to sufficient private savings to fund some period of state pension deferral. A combination of pension drawdown and deferral is a viable option for those seeking to generate a lifetime guaranteed income and a genuine alternative to buying an annuity, according to Fidelity.
Fidelity estimated that by deferring for two years individual retirees with sufficient resources could get an additional £18,800 over their lifetime, even after spending the necessary funds from their private savings.
Overall, Fidelity calculated that the optimum time for deferring the state pension averages out at seven years. By doing so, retirees could potentially generate £1,640 of additional guaranteed and inflation protected income every year, or £40,300 over their lifetime.
However, should circumstances change during a lengthy period of deferral, these missed payments are not lost, as a retiree can still choose to take them as a cash lump sum taxed at current income tax rate, instead of an enhanced pension provided they have deferred for more than 12 months.
All deferred monies will then be re-paid with interest at 2 per cent above the base rate.
To provide this extra income, people must use capital which is repaid over their life. Some will die earlier than expected and need to live for more than 10 years after state pension age for this to pay off, but that is a reasonable prospect for the majority of retirees.
Alan Higham, retirement director at Fidelity, told FTAdviser the at-retirement reforms mean that people will have the pension pots to enable them to defer and effectively double their money.
“People are simply unaware, the government doesn’t explain it and many advisers see themselves as product specialists, so avoid looking at state pension benefits.
“I think advice on retirement needs to be more holistic, as this is just an issue people have not thought through,” he added.
peter.walker@ft.com
