Deferring State Pension


I was reminded about this and started thinking about it in a bit more depth after chasing up HMRC about some lost Class 3 additional contributions and coming across the details of the State Pension Deferral scheme on the HMRC website (what-you-get).  The old scheme gave you a 10% or so increase in pension for each year deferred.  This has now reduced to 5.8% so you only get your money back after 17 years of receiving your pension - which seems a hell of a long time.

But looking at it from another viewpoint where else can you invest and receive a 5.8% inflation linked return.  Deferring an £8000 p.a. state pension for one year purchases a £464p.a. additional pension.  An inflation linked annuity (OK it´s a bit better -  RPI not the CPI of a state pension) would cost about £14,500.  An optimistic drawdown rate of 4% implies an investment of £11,600 to obtain the same income maybe with some upside opportunity and access to the capital - but also with no guarantees.

So maybe deferral it's a very sensible option - liquidate some investments which aren't in a tax efficient wrapper such as an ISA - and use this to replace the deferred state pension for 1, 2, 3+ years. Perhaps with some tax advantages also - the pension would be subject to income tax and the sale of investments would only be subject to capital gains tax and probably be under the annual cgt allowance.


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