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A Pension Intention

July 2014

stock image of saving money for pension

A Pension Intention

If you listened to the Radio on 23rd July, you may have heard the announcement that the government intend to reduce the uplift in the state pension for those who defer taking it, to 6% with effect from April 2016. No much of an announcement, but it is one that could have significant ramifications for those near to or just about to face retirement.

What is the effect of deferment?

Currently you don’t have to take your state pension entitlement when you reach pensionable age – you can defer that decision for up to five years and either take a cash lump sum, from which you will pay tax at your highest rate, or you can take and increased pension calculated at 10.4% for every full year that you defer taking it. Over a five year period you could therefore increase your weekly pension by 52%. Compare that to inflation over the same period and you can see that it equates to a very good return. Even when the rate is reduced to 6% for a five year period the return is still 30% over five years which is still well ahead of anything you can get by investing in any bank or building society.

Who might want to do this?

Following the abolition of age discrimination you can’t be forced to retire, simply because of your age. You may want to continue for several years and may continue to earn at a level greater than the substitute pension. If you don’t need to take your state pension when you reach state pension age to cover day to day living you may be considering deferring it to build up a Capital Lump sum, which may pay for that round the world trip you have promised yourself when you finally retire! Alternatively, your income may be just enough to live on and to defer the state pension for a year or two and take an enhanced sum annually may just help to make your retirement more comfortable.

For those with personal pension plans the decision is even more complicated if you continue to earn. Do you take you personal pension and state pension at a time when you may not need it or do you defer one or both of them and which one? Of course we know why the Government are proposing this change – to save money but it does highlight an issue that is facing many baby boomers today.

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