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I’m getting more out of my retirement income by deferring my State Pension.

Peter, 66, is divorced and doesn’t have any children. He has final salary pension income of £6,000 per year, £40,000 of savings and a defined contribution pension pot of £22,000. He was eligible to claim his State Pension last year but decided to defer this.


What Peter wants

I’ve realised that if I defer taking my State Pension then I’ll get a bigger one when I do eventually claim it. I’m going to use my pension pot to help me do that.

Peter's idea

My final salary pension is £6,000 a year and my State Pension would be £9,275.49 a year if I started taking it now (£8,767 at the normal rate plus £508.49 for deferring it last year). But if I receive over £12,500 in a year, I’ll have to pay basic rate tax. I’ll use my pension pot to supplement my final salary pension, keeping me within my personal allowance for four years. I’ll also continue to defer my State Pension for another four years and benefit from the extra amount I'll receive when I do finally claim it.

What Peter does

  1. Peter takes a quarter of his pension pot as a tax-free cash sum of £5,500

  2. He uses the rest to buy a fixed term annuity over 4 years receiving £4,200 a year

  3. By withdrawing this amount, added to his final salary pension, Peter’s total income is within his personal allowance, so isn’t taxed

  4. He will use this income and continue to defer taking his State Pension for four years

  5. By deferring his State Pension, he’ll get an extra 5.8% (£508.49) a year  once he starts claiming making his State Pension £11,309.45 a year after deferring for five years (annual increases in the State Pension mean the amount could be higher than this).

What Peter gets

Tax-free cash £5,500
Fixed term annuity £4,200 a year

See how we worked this out

  • State Pension age65
  • State Pension£11,309.45 (deferred 5 years)
  • Pension pot£22,000
  • Other income£6,000 a year
  • Other savings£40,000
  • Property value£195,000

Peters calculation - Years 1-4

Personal allowance (0% tax) Earnings from £0 to £12,500
Final salary pension £6,000 a year
Remaining personal allowance £6,500
Fixed term annuity £4,200 a year

Year 5 onwards

Final salary pension £6,000 a year
State Pension (deferred) £11,309.45 a year
Total income (subject to tax) £17,309.45 a year

Important things to consider

  • Because he deferred his State Pension, Peter is able to take his entire defined contribution pension pot tax free

  • The income Peter receives from his fixed term annuity is a fixed amount for 4 years. As a result, the effect of inflation will reduce the buying power of his income over the term of the plan

  • As Peter has decided to defer his state pension, he’ll be able to increase the weekly amount he receives when he finally decides to take it. However, he’ll need to weigh up the advantage of the higher deferred pension he’ll receive, against the income he may be missing out on for each year he defers

  • As Peter has chosen to guarantee the income, if he dies before the end of the fixed term annuity, his estate will continue to receive the income until the end of the annuity term.

  • After 4 years, Peter’s fixed term annuity will end. He will then have to rely on his savings, final salary and State Pension in retirement unless he has any other assets he can use to give him an income or is able to claim any additional state benefits

  • Better deals may be available so it’s important to shop around

  • Once a fixed term annuity is set up and the cancellation period has expired, he may not be able to cancel or change his options

  • The State Pension amount shown here is the current maximum and is only an example. The amount you get depends on your National Insurance contributions’ record and your individual circumstances. You can get a State Pension forecast by visiting View - Check your State Pension

  • This example is based on current law and tax rates. These may change in the future and income tax will depend on individual circumstances

  • If you live in Scotland or Wales you may have a different income tax rate or band

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