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This year’s retirees could cause massive black hole

Up to £11.9BN worth of State pension benefits potentially lost over a lifetime by people retiring this year.

Retirees reaching State Pension age before 6 April 2016 can defer taking State Pension and receive a generous increment of 10.4 percent per annum. FOI request shows that 92 percent of people do not defer taking the State Pension losing valuable extra future income. Just deferring for two years could net individual retirees an extra £19,000 of guaranteed lifetime income. Fidelity Worldwide Investment estimates that optimum period is 7 years’ deferral: generating an additional £11.9bn across those who might reasonably benefit.

Retirees who have already reached State Pension age or who will do so before April 6 2016 could be potentially missing out on thousands of pounds worth of extra income over their lifetimes by failing to defer their State Pension, analysis by Fidelity Worldwide Investment has revealed.In a freedom of information request submitted by Fidelity to the DWP, figures show that for the six months to February 2014, just under 270,000 people started to draw State Pensions, of which only 23,000 were people who had been deferring, while 247,000 (92 percent) drew the pension immediately.

However, all retirees who reach or have already reached State Pension age before April 6 2016 can defer their pension under very generous rules. Receiving a 1 percent uplift to their income for every five weeks of deferral, this amounts to a 10.4 percent boost in State Pension every year, so 20.8 percent after 2 years etc1. To do so, a typical retiree just needs to have £6,970 in private savings or other sources of income for each year they defer, which equates to what they would have received from the basic State Pension had they claimed immediately. As it stands, a reasonable estimate is that around 60 percent of the nation’s retirees2 have access to sufficient private savings to fund some period of State Pension deferral. A combination of pension drawdown and State Pension deferral is a viable option for those seeking to generate a lifetime guaranteed income and a genuine alternative to buying an annuity.

Compared to those who draw their State Pension immediately Fidelity estimates3 that, by just 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. On a national level, this adds up to £5.6bn additional income.

Overall, Fidelity calculates 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. Globally, this would equate to a massive £12bn over the lifetime of the nation’s retirees. However, should circumstances change during a lengthy period of deferral – for example ill health or a requirement for immediate capital over later income – 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 percent above the Bank of England base rate.

 

Source: Fidelity Worldwide Investment – see footnote 3 for key assumptions

To provide this extra income, people must use capital which is repaid over their life. Some people die earlier than expected and you will 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. The extra secure income it produces could result in lower inheritance especially for beneficiaries of single people. Alan Higham, Retirement Director at Fidelity Worldwide Investment said: “The new private pension freedom rules can be used to help people secure a better retirement in a number of ways. Those reaching State Pension age before 6 April 2016, including those who have already retired, can benefit from generous terms to defer taking their State Pension.

“Everyone started to receive a State Pension within the last 10 years or due one before 6 April 2016 should consider carefully whether it is possible to use other assets to suspend or defer taking State Pension and to consider whether this option is best for them. People need to bear in mind that the Government could reduce the rate they pay at some future point so the decision to defer should be kept under review in case the terms do change4.

“The new pension freedoms would now allow someone to suspend or defer taking their State Pension for many years whilst they draw down on their private pension and this option should be discussed with people as they are given guidance on their pension choices. It won’t be suitable for everyone (especially those with seriously poor health) but given the very low numbers of people choosing this option, there is a big job to be done in raising public awareness. Retirees looking to defer their State Pension should always seek the appropriate guidance or advice as deferring could negatively impact on some other welfare benefits whilst people with no other source of income after State Pension age would notbe able to afford to defer taking it.”

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