Consider extending your active work years and delaying the receipt of your state pension.
The IMF recently announced that a person aged 70 in 2022 possesses the same cognitive abilities as a 53-year-old in 2000, and their physical health has significantly improved, comparable to a 56-year-old's fitness in 1997. These developments suggest that baby boomers in the UK might have the opportunity to extend their working lives, pushing back the need to draw their pensions.
According to the UK's Annual Population Survey, 1.12 million people aged 66 and above are currently employed, accounting for 9.5% of this age group. As a result, the prospect of productive working years past the traditional retirement age has arisen.
The monetary benefits and social aspects of working longer can be enticing. According to the IMF, those who decide to remain employed beyond the average retirement age can expect a 30% increase in their earnings. Deferring the pension can lead to a larger retirement fund, as earnings supplement the pension upon its eventual collection.
Individuals approaching their state pension age (currently 66, rising to 67 by 2028) could consider deferring their pension, which may boost subsequent weekly payments. In June 2021, a survey showed that 25% of British adults aged 55-64 were unaware of this option. Women were more likely than men to be uninformed of the deferral option.
Those who reached state pension age before April 6, 2016, and receive the basic state pension can choose to defer and receive an extra 10.4% of their pension for each year deferred. If they opt for a lump sum payment in lieu of a higher weekly amount, it will include interest of 2% above the Bank of England base rate.
Those receiving the new state pension can defer their pension and receive a 1% increase for every nine weeks deferred, equivalent to an increase of approximately 5.8% for each full year. As with the basic state pension, the extra amount is paid with the regular state pension payment.
Deferring the state pension can be a viable option for individuals who can manage without it, perhaps due to employment, sufficient private pension income, or tax-free sources like ISAs. However, the choice to defer a private pension may depend on the specifics of the pension scheme.
By weighing the potential benefits against the missed earnings, individuals can decide whether deferring their state pension makes financial sense. For those who work past pension age, deferring their pension might help reduce the impact of taxation on their earnings.
Personal finance experts suggest that considerations for baby boomers in the UK should now include the possibility of deferring their pensions, as the prospect of extended working lives arises. Deferring a pension can lead to a larger retirement fund due to earnings supplementing the pension upon its collection, which is a significant aspect of personal finance management.
