Polish up on state pension options

By Andrew Tully

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Dec 05, 2018
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State pension equalisation brings yet more changes to the complex bedrock of retirement income

Almost a quarter of a century after it was first mooted, the women’s state pension age has hit 65, reaching a level equal to that of men. The rise in women’s state pension age started in 2010, before which it could be claimed at 60.

The original plan was to increase the age gradually from 60 to 65 between 2010 and 2020, but this was accelerated by the Pensions Act 2011. A move towards age 66 for both men and women will follow over the next couple of years.

There are a number of anomalies with the new timetable. All women born between 6 November and 5 December 1953 would have reached state pension age on 6 November 2018. So it will have dropped back by up to a month for some.

From there, implementation continues in a not-so-equitable manner (see table).

Those born between 6 December 1953 and 5 January 1954 will get their state pension on 6 March 2019. That is age 65 years and two months for some but 65 years and three months for others.

The theme continues, with those born between 6 January and 5 February 1954 reaching state pension age on 6 May 2019 – between 65 years and three months and 65 years and four months old. And so it goes on, until those born between 6 September and 5 October 1954 get their benefits on 6 September 2020.

After that, people will get their state pension on their 66th birthday. That is until we start the next move upwards to age 67, which is due to take place between 2026 and 2028, affecting those born after 5 April 1960. The current plan is for a further increase to age 68 between 2044 and 2046 – relevant to those born from 6 April 1977 – but it seems inevitable this will be brought forward.

To defer or not to defer?

All of this comes against a backdrop of more people continuing to work in later life. According to the Department for Work and Pensions, 10.4 per cent of over-65s are still working, double the amount from 20 years ago. The average age on leaving the workforce is 65.1 years for men, up from 63.1 in 1998. For women, the change is starker: up to 63.9 years from 60.6.

Of course, some of these people continue to work through choice; for others it is down to necessity. In either situation, there is the ability to defer the state pension until a later date.

However, the benefit of doing so is considerably less than it was prior to the introduction of the single-tier pension in 2016.

Today, people get an additional 1 per cent of pension for every nine weeks they defer, rather than for every five weeks as it was for those who reached state pension age before April 2016.

There is also no longer the option to take the additional benefit as a lump sum, with the arrangement only giving a greater income when it comes into payment.

So if someone did not take their state pension for one year, they would get a future state pension of £493 a year higher (just below 5.8 per cent of the maximum single-tier pension of £8,546.20). This means people will need to live around 17 years before the money they receive from their higher state pension outweighs the loss of the first year of income (although it depends how much the state pension increases in the future).

That is not to say there are no potential benefits in deferring – for example, reducing taxable income for those who stay in work – but there is a risk people will lose out financially if they die relatively early. Taking the state pension at state pension age and reinvesting any income not needed into an Isa or pension is an alternative option.

Meanwhile, although pension ages are equalising, there remain significant differences in state pension payments themselves.

DWP figures show the average pension paid to men is £153.97 a week, compared with £126.72 paid to women. There remains a need for many people – especially women – to notify DWP if they are caring for elderly relatives or grandchildren to claim any credits.

State pensions remain the bedrock of retirement income, but they are complex and the position is constantly changing. Using the online state pension forecasting tool is the simplest way to find the accurate information for any client.

Andrew Tully is pensions technical director at Canada Life

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