I write to ask for your help, advice and guidance regarding the deferment of the state pension.
Briefly, I reached state pension age two years ago and deferred my pension. I am now finally at the stage to access my state pension.
I have been in constant telephone contact since May with the Department for Work and Pensions requesting confirmation of the precise details of what my pension would be, a simple question to ask but I had conflicting information from each of the advisers spoken with.
I was given the following information: the actual amount payable for the first year of deferment amounts to £10,000 (minus tax at 20 per cent) plus 2 per cent interest.
Payment decision: I deferred my state pension for two years and I’m baffled by options offered by DWP (Stock image)
For the second year of deferment, the amount owed would be payable as an additional amount to be included in the actual state pension.
I have been in contact with the DWP again, who now inform me that on my application form I am to backdate my request for my pension to the first year – 2021.
The second year does not count for any consideration towards an additional amount to be included in the actual state pension.
I am going round in circles and getting nowhere fast. I have also accessed the gov.uk website for clarification but have only found basic information.
I am confused to say the least. I would be extremely grateful if you could shed light on this for me.
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Steve Webb replies: I can well understand why you are confused, and some of the information you have been given simply sounds incorrect.
Until the new state pension system was introduced in April 2016, people who put off taking their state pension could be rewarded in one of two ways when they finally came to claim.
Either they could have a lump sum (plus a bit of interest) to cover all the pension payments they had missed or they could have a permanently enhanced level of pension instead.
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For those, such as yourself, who reached state pension age after 5 April 2016, the lump sum option was removed.
Instead, people who defer taking their state pension simply get a permanently higher rate when they do finally take their pension.
At present you get an extra 5.8 per cent on your pension for each complete year that you put off claiming.
However, there is still a way of getting a lump sum for some of the period of deferral and that is what you are being offered.
What DWP are suggesting to you is that you *backdate* your state pension claim.
Although you are claiming now, you can ask for your claim to be backdated by up to a year.
Any money due to you between the date you put on your claim and today’s date is simply paid out as a lump sum (though without any interest).
If we suppose that it is exactly two years since you reached pension age, what they are suggesting is that you backdate your claim by the maximum allowed, which is one year.
You are then treated as if you had deferred claiming for one year (from 2020 to 2021) – and so get an extra 5.8 per cent on your pension for as long as you live.
Then they treat you as if you had actually claimed a year ago and they simply need to make up the missing payments, which they are doing as a lump sum.
As you say, the lump sum is taxable at whatever income tax rate you currently pay.
So, if you are a basic rate taxpayer in the year that you receive the lump sum, you will pay basic rate tax on the lump sum.
You may however be offered a choice as to which year you want the lump sum to count, and this might be worth looking into if your tax rate is likely to be different between the two years.
Your main options here are either to go along with what they suggest, and get a mix of a higher pension for a year of deferral and a modest lump sum, or alternatively to put today’s date on your pension claim.
In that case you simply get a further enhanced pension – increased 11.6 per cent for two years of deferring – but no lump sum.
Listen to our special podcast where Steve Webb answers readers’ pension questions on the player below, or at Apple Podcasts, Audioboom, Spotify or visit our This is Money Podcast page.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at firstname.lastname@example.org.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.