State Pension Tip That Puts Extra Cash In The Bank

Putting off your state pension and living off savings could add thousands of pounds to retirement income – providing you are the right age and act quickly.

Financial firm Fidelity has calculated that canny management of retirement money can boost the state pension by up to £10,800.

To help, the company has issued a step-by-step guide detailing how to get that extra cash.

First, you need to qualify – that means reaching the state pension age before the flat rate scheme starts in April 2016.

That means you need to have passed your 63rd birthday in April 2014 for men or 61st birthday for women. Anyone who is younger will not qualify.

How to boost your pension

Then, take your option to defer payment of the state pension – which triggers the government adding a cash bonus to your state pension pot.

For each year of deferred state pension, the government pays a 10.4% bonus and links the pension fund with inflation.

So, delaying drawing a state pension of £7,000 a year for four years adds that bonus every year.

In money terms, that’s an extra £2,700 a year – assuming inflation at 3.5%.

Over four years, the deferred payment adds up to £10,800.

Meanwhile, the company suggests taking advantage of the new government easy access rules for small pot pensions to replace the state pension.

Crunching the numbers

Over those years, the state pension without the deferred payment bonus would give an income of around £28,000.

Anyone with an average pension pot of £35,000 on retirement can take 25% (£8750) tax free and then pays tax at 20% on the balance if they are a basic rate taxpayer. That leaves a pension sum of £21,000 plus the £8,750 lump sum – a total of £29,750.

Effectively, some smart money management has earned you interest of 10.4% on the state pension pot, which is a sum far in excess of what you could expect to earn from reinvesting the personal pension while living off the state pension.

The strategy will not work for everyone – age and how you want to spend your pension money need taking into account.

As with everything financial, crunch the numbers before committing to any arrangements.

“Our suggestion is just one strategy to help eke out retirement money,” said a Fidelity spokesman. “Not everyone qualifies and personal financial circumstances may mean deferring the state pension is not the right decision for some people.”

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