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Is the state pension clients’ biggest retirement asset?

Many advisers and clients are sceptical of state pension deferral but there are big benefits to be had


Last month’s inflation rate of 3 per cent will be bad news for most but those over state pension age may be less glum. The September figure is considered for the annual up-rating of state pensions, and with inflation higher than earnings increases and the 2.5 per cent underpin of the triple-lock, it should see a boost of just under £4.80 a week.

This lifts the new state pension to around £8,570 a year. An inflation-linked annuity for that amount for a 65-year-old today would cost just over £266,000. The benefit of the triple-lock, for as long as it lasts, makes the cost of fully replicating the state pension using an annuity even higher.

Given its value, do we make enough of it as part of retirement strategies? The opportunity to top up state pension closed earlier this year but there is still scope for people to close gaps in their National Insurance record to make sure they are getting the maximum entitlement. Given the cost of replacing that income in the market, it seems a no brainer.

Pension savers to get income boost as inflation rises

But what about state pension deferral? Many advisers are sceptical of this and clients will be reluctant to not claim something they have contributed all their life for. Following the changes to the terms of deferral for those retiring after 5 April 2016, these challenges may be even more justified. But if we consider this option as an alternative to buying an inflation-linked annuity it makes sense. In fact, it could deliver nearly 50 per cent more income.

We looked at somebody with £50,000 to commit to guaranteed income and compared how much they would get in additional income from deferring their state pension and living off the £50,000 until it ran out versus buying an inflation-linked annuity.

If I bought an inflation-linked annuity, I would get only £1,600 or so of additional income. This would mean I would have a starting income of around £10,170 once added to my state pension. Deferring state pension, I could take a starting income of just under £11,000 from the fund until it ran out, which would take just under five years.

This is around £2,400 above the new state pension, an increase of 28 per cent on the state pension and 50 per cent more than the annuity. Once the fund is exhausted, my state pension starts at a level 28 per cent higher than it would otherwise have been.

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But what if the client dies before the higher state pension pays back the missed payments? It is a risk but the same applies to an annuity. Remember too the deferred state pension can be taken as a lump sum so if a health concern emerged during deferment this could provide a useful escape route.

This analysis does not factor in tax. If taking my state pension now means I pay a higher rate of tax than I would if I deferred it a few years, then again the numbers look convincing.

Of course, people want what is rightfully theirs but do not let that get in the way of sound financial planning.

Richard Parkin is head of pensions policy at Fidelity International



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Andy Robertson-Fox 27th October 2017 at 11:31 am

    Ah yes, all this talk of 3% rise through CPI and a triple lock safety net of 2.5% for State Retirement Pensions……and not a word about the 4% of all UK pensioners world wide – or one in twenty-five and 550,000 in total who get a 0% rise each and every year simply because they live in the “wrong” overseas country.
    Time for the money marketing organisation to really add their weight to the universal pension parity campaign?

  2. I don’t think the option of taking a lump sum is available if you reach SPA after 5th April 2016.

  3. As Andy Robertson-Fox has pointed out 4% of state pensioners get nothing, a big fat 0, just because of where they happen to retire to. Frozen for decades and yet this outrage is allowed to go on year after year. When is somebody going to stand up and demand this theft of pensioners indexing is stopped?

  4. By the way Richard Parkin why is giving pensioners, who already have one of the lowest state pensions in the world, a 3% measly rise bad news? This resentment of seniors getting a raise is of course a product of constant picking on pensioners from the government down. We never used to resent our elderly having a pension, we understood they had earned it and we should be looking after our seniors not sending them into poverty. Without their paying off the debt from WW2 for decades you wouldn’t have the life enjoy you have now.

  5. Deferring State Pension is a big red herring.

    You might get a larger pension in payment but by deferring income for 5 years you would be missing out on just over £45,000 of income, assuming an increase of 2.5%. Of course you’d get an income which is 28% higher but it would take well over 10 years before your increased deferred pension made up for missing 5 years of income plus you would have eroded £50k.

  6. Andrew Robertson Fox & Jane Davies have highlighted a situation that the Gov’t prefer not to talk about, especially now with post Brexit trade talks with “frozen pension” countries approaching!
    The 550000 pensioners currently being impoverished is a miniscule amount were Gov to enforce Section 20 worldwide – as they’re quite able to do.
    As far fetched as this might seem, Section 20 is UK law, but where is its opposition? Why isn’t there more opposition to a foul law that unjustly discriminates and then impoverishes its victims by freezing their fully paid for pensions for the rest of their days?
    Why aren’t the pensioners organisations in Britain crying foul over what could happen to anyone who decides to retire abroad – and there’s enough who’d like to do just that.
    Come on, think of those already suffering, but also think of the millions who could very easily join them.

  7. The Frozen pension has been raised again and it will be raise wherever and whenever an article appears because of the blatant discrimination used to implement what is ‘fraud’ in the real world of pensions.
    As Andy Robertson-Fox has suggested, support for pension parity for us from those on the pension industry could be a great asset and bring about a change of policy. After all the government are only too quick to point out your shortcomings and we pensioners , being abroad, do not have the same access to government as say the WASPI ladies who can lobby by the thousand outside of parliament to try to change the pension issue that affects them.
    We cannot afford to do that which makes our position of ‘being over there’ easy to ignore which has been the case ever since we started to be affected by inflation to our detriment.

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