Britons who choose to delay claiming their state pension after reaching retirement age could lose out financially, according to a leading pensions expert.
Those hoping to boost their income are warned it may actually result in a net loss for them.
Steve Webb, former pensions minister and partner at LCP explained that while deferral can increase one's weekly pension amount, the maths doesn’t always work in their favour the longer they wait.
He warned of situations when "deferring becomes less good value with every passing year."
A pension minister warned of situations when "deferring becomes less good value with every passing year"
GETTYIn his This is Money column, Webb answered a reader question from someone who reached retirement age in 2017 and is still working full time.
He said: "Your 'reward' for each year of deferral is a 5.8 per cent boost to the rate of pension you will be paid.
"However, when you defer for a second or further year, the reward for deferring does not go up – it is still 5.8 per cent of your base pension. This means that deferring becomes less good value with every passing year."
Using the example of someone who deferred their pension from age 66, Webb pointed out that they could expect to live for another 17.8 years on average.
Britons are looking for more security when it comes to their pension savings GETTYHe added: "If we multiply the 17.8 years by a 5.8 per cent boost, we can see that you would typically get back roughly 100 per cent of one year's pension as your reward for deferring for one year, thereby roughly breaking even."
But that equation changes with age. Webb noted that at 73, a person could expect to live for around 12 more years, on average. "But 12 lots of 5.8 per cent is well short of 100 per cent," he said. “In other words, on average, you could expect to lose out if you defer another year from now."
Webb also warned of the risks of deferring too long, particularly if a person were to die before ever claiming their pension.
He continued: "If you have no spouse then your pension would simply die with you, aside from a strange rule which would allow your heirs to make a posthumous claim on your behalf and receive three months’ worth of payments as a lump sum."
Government rules offer a 5.8 per cent boost for every year deferred
GETTYEven where there is a surviving spouse, the current system offers limited protection as the provision for widows under the new state pension system is very "limited".
However, there may still be some tax advantages to deferring for people who continue working and want to avoid their pension income being taxed on top of their salary.
Webb said: "If you enjoy working and plan to continue doing so, there can be tax advantages to deferral, as otherwise your state pension would be added to your wage and this could potentially push you into a higher tax bracket."
He emphasised that the right decision depends on personal circumstances, but warned the simple arithmetic of deferral means that, other things being equal, it becomes less attractive to defer the longer you leave it.
