10 per cent boost to your pension: Millions could benefit from bonus scheme
PEOPLE could add thousands of pounds to their State pension by delaying taking it for as little as a year.
A little-known policy offers a generous 10.4 per cent bonus for each year of deferral plus annual inflation-linked increases.
And those who have not been able to build up a large private pension pot could benefit from a much larger pension than they expected.
Anyone reaching state pension age this year - and even those already taking the State pension - can use new pension freedoms to take advantage of the scheme.
Instead of taking their state pension immediately and buying an annuity with their private pension, retirees can live off their private pension whilst forgoing their state pension. This will give them a much bigger income overall.
Take for example, someone who has a private pension fund of £25,000 - which will only buy them an annuity of £900 a year - and state pension of £6,000 a year.
If they take the pension money now and buy an annuity with it, they will get £6,900 a year in inflation-linked income for life.
Or, they could defer their State pension for three years and run their private pension fund to zero over same period. The state pension would then pay £7,870 a year in inflation-linked income for the rest of their life.
If they defer it for even longer, say five years, the State Pension would be £12,160 plus inflation increases per annum.
Millions of people could potentially benefit as the scheme can be started even if someone has already started getting the State pension.
However the current rate on offer is set to be cut to 5.8 per cent from April 2016 and retirement experts are exhorting people to beat the deadline.
Alan Higham, retirement director at Fidelity, said: "Everyone should try to cover their essential life expenses with secure income such as State pension or annuities.
"But annuities are so expensive that people reaching State pension age before April 2016 should look at the generous terms for deferring or suspending State pension.
"You can defer State pension for three years at a cost of £25,000 to secure a guaranteed income for life linked to inflation that would cost £55,000 to buy from an insurance company.
"What's more, if you decide after deferring your State pension that you wish you could have your money back rather than a boost to your income then you can.
"If you defer State pension for more than one year then there is also the option to have the missed payments paid back to you with interest two per cent a year above Bank of England rate.
Express Debate - We Need Better Advice On Pensions
If you defer State pension for more than one year then there is also the option to have the missed payments paid back to you with interest two per cent a year above Bank of England rate
"All those people who qualify for these generous terms (men born before 6 April 1951 and women born before 6 April 1953) should explore deferring State pension as part of their retirement plans.
"It boosts your secure lifetime income and gives you the option to have a lump sum instead if your circumstances change."
Until last year's March Budget, delaying your state pension was viable only if you continued to work beyond retirement age or had savings on which to live in the interim.
But under the new pension freedoms announced by the Chancellor, from April people can access their pension pots and live off that money.
When these pension funds run out, you simply lock into the State pension you deferred, which is guaranteed by the Government and should increase each year with inflation.
But pensions minister Steve Webb has confirmed that when the new state pension is introduced in April 2016, the amount of increase will be cut.
It will reduce the amount people can make by deferring their state pension by potentially tens of thousands of pounds - and almost double the amount of time it takes to make deferring worthwhile.
The move is expected to save the Government £200million-a-year by 2020, and £300million-a-year by 2030.
There was more good news yesterday (Thurs) for workers approaching retirement as some pension experts predicted that bond yields will rise next year, and this could translate into higher annuity rates.
Billy Burrows, of Key Retirement Solutions, said: "My best guess that yields will bounce back during 2015, so we can expect annuity rates to return to the levels seen at the beginning of the year.
"This might mean that for very £100,000 invested the annuity income should increase by about £300 a year."
However, he adds that people thinking about buying an annuity in the first half of 2015 shouldn't necessarily expect a higher rate, because any increases are likely to be gradual.
Retirement planners say annuities will remain the best way of generating pension income for many people, even if they do have more choice when the new pension freedoms are introduced in April.
Mr Higham added: "Once people realise there's no magic bullet solution post April 2015, then we should see a very modest pick-up in annuity sales.
"But if you are going to buy an annuity in 2015, make sure you shop around the whole of the market. The top rate has been paying five per cent more than the average of the best four rates. The worst rates can be 30 per cent below the best, and the gap can be even bigger if you are in poor health."
