I am writing to ask for your help, advice and guidance regarding the state pension deferral.
In short, I reached the legal retirement age two years ago and deferred my pension. I am now finally at the stage of accessing my state pension.
I have been in constant telephone contact since May with the Department for Work and Pensions asking for confirmation of precise details of what my pension would be, a simple question to ask but I had conflicting information from each of the advisers I met.
I have been given the following information: The actual amount to be paid for the first year of deferment is £10,000 (less tax at 20%) plus 2% interest.
Payment decision: I have postponed my state pension for two years and am confused by the options offered by DWP (Stock image)
For the second year of deferment, the amount due would be payable as an additional amount to be included in the actual state pension.
I have again been in contact with the DWP, who are now informing me that on my application form I need to backdate my pension application to year one – 2021.
The second year is not taken into account for the consideration of an additional amount to be included in the actual state pension.
I’m going around in circles and I’m getting nowhere fast. I also checked the gov.uk website for clarification but found only basic information.
I’m confused to say the least. I would be extremely grateful if you could enlighten me on this.
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Steve Webb responds: I can very well understand why you are confused, and some of the information given to you just seems incorrect.
Until the introduction of the new state pension system in April 2016, people who delayed receiving their state pension could be rewarded in two ways when they finally came to apply.
Either they could have a lump sum (plus a little interest) to cover any pension payments they had missed, or they could have a permanently upgraded level of pension instead.
Steve Webb: Find out how to ask the former Pensions Minister about your retirement savings in the box below
For those, like you, who reached statutory retirement age after April 5, 2016, the lump sum payment option has been removed.
Instead, people who postpone taking their state pension simply get a higher rate permanently when they finally take their pension.
Currently, you receive 5.8% more on your pension for each full year you delay.
However, there is still a way to get a lump sum for part of the deferral period and that is what you are offered.
What DWP is suggesting to you is that you *backdate* your state pension claim.
Although you are claiming now, you can request that your claim be backdated up to one year.
Any money owed to you between the date you filed your claim and today’s date is simply paid as a lump sum (but without any interest).
If we assume that it has been exactly two years since you reached retirement age, what they suggest is that you backdate your claim by the maximum allowed, which is one year.
You are then treated as if you had postponed your claims for a year (from 2020 to 2021) – and so you get a 5.8% top-up on your pension for as long as you live.
Then they treat you as if you actually claimed a year ago and they just have to make up the missing payments, which they do as a lump sum.
As you say, the lump sum is taxable at the income tax rate you currently pay.
So if you are a base rate taxpayer in the year you receive the lump sum, you will pay base rate tax on the lump sum.
You may, however, be offered the choice of which year you would like the lump sum to count for, and this may be worth considering if your tax rate is likely to be different between the two years. .
Your main options here are either to accept what they suggest, and get a mix of a higher pension for a deferral year and a modest lump sum, or put in today’s date. today on your pension application.
In this case, you simply get an additional enhanced pension – increased by 11.6% for two years of deferral – but no lump sum.
Listen to our special podcast where Steve Webb answers readers’ retirement questions on the player below, or on Apple Podcasts, Audioboom, Spotify or visit our This is Money Podcast page.
Ask Steve Webb a question about retirement
Former Pensions Minister Steve Webb is This Is Money’s Agony’s uncle.
He’s ready to answer your questions, whether you’re still saving, quitting work, or juggling your finances in retirement.
Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner in actuary and consultancy firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to respond to your message in an upcoming column, but he won’t be able to respond to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will remain confidential and will not be used for marketing purposes.
If Steve is unable to answer your question, you can also contact MoneyHelper, a government-backed organization that offers free pension assistance to the public. He can be found here and his number is 0800 011 3797.
SteveWe get a lot of questions about state pension forecasts and about COPE – contracted pension equivalent. If you write to Steve on this subject, he answers a typical question from a reader here. It includes links to several of Steve’s previous columns on state pension forecasts and contracting out, which might be helpful.
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