I am asking for help, advice and recommendations regarding the postponement of the state pension.
Long story short, I reached retirement age two years ago and delayed my retirement. I am now finally at the state pension stage.
Since May I have been in constant phone contact with the Department for Work and Pensions asking for confirmation of the exact details of what my pension will be, a simple question but I have had conflicting information from each of the advisers.
I was given the following information: The actual amount payable for the first year of deferment is £10,000 (minus 20 per cent tax) plus 2 per cent interest.
Payment decision: I’ve delayed my state pension for two years and I’m confused about the options offered by the DWP (photo)
In the second year of deferment, the amount owed will be paid as an additional amount that will be included in the actual state pension.
I contacted the DWP again who have now told me that I have to backdate my pension claim to the first year – 2021 – on my application.
The second year does not count towards the additional amount which is included in the actual state pension.
I’m going in circles and getting nowhere fast. I also went to gov.uk for clarification but only found basic information.
I am confused to say the least. I would really appreciate it if you could shed some light on this for me.
SCROLL DOWN TO LEARN HOW TO INVITE STEVE YOURS PENSION QUESTION
Steve Webb replies: I can understand why you are confused and some of the information you have been given just doesn’t sound right.
Until the new state pension system was introduced in April 2016, people who delayed claiming their state pension could be rewarded in one of two ways when they finally applied for it.
Either they could get a lump sum payment (plus a little interest) to cover all the pension payments they missed, or they could have a permanently increased level of pension instead.
Steve Webb: Find out how to ask the former pensions minister about your retirement savings in the box below
For those who reached pension age after 5 April 2016, like you, the lump sum has been removed.
Instead, people who delay taking their state pension simply get a consistently higher rate when they finally do.
Currently, you get an extra 5.8 percent on your pension for every full year you put away.
However, there is another way to get a lump sum payment for some grace period and this is what you are being offered.
What the DWP offers you is to *backdate* your state pension claim.
Even though you are filing your claim now, you can request that your claim be backdated up to a year.
Any money owed to you between the date you made your claim and today is simply paid out in one lump sum (although without interest).
If we assume that exactly two years have passed since you reached retirement age, they assume that you will retroactively file your claim for the maximum year allowed, which is one year.
You are then treated as if you had deferred claiming for one year (from 2020 to 2021) – and therefore receive an extra 5.8 per cent on your lifetime pension.
They then treat you as if you actually filed a claim a year ago and they just need to make up the missed payments, which they do in one go.
As you said, the lump sum is taxed at whatever rate of income tax you currently pay.
So if you are a basic rate taxpayer in the year you receive the lump sum, you will pay basic rate tax on the lump sum.
However, you may be asked to choose which year you want the lump sum to be credited, and this may be worth considering if your tax rate is likely to be different between the two years.
Your main options here are to either accept what they’re offering and get a combination of a higher pension for a year of deferment and a modest lump sum, or alternatively put today’s date on your pension application.
In that case, you’ll just get an even higher pension – 11.6 per cent over two years of deferment – but no lump sum.
Listen our special podcast where Steve Webb answers readers’ questions about pensions on the player below, or on Apple Podcasts, Audiobook, Spotify or visit our This is the Money Podcast page.
Ask Steve Webb a retirement question
Former pensions minister Steve Webb is a cash-strapped uncle.
Whether you’re still saving, quitting your job, or juggling your finances in retirement, he’s ready to answer your questions.
Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner in the actuarial and consulting firm Lane Clark & Peacock.
If you want to ask Steve a question about pensions, email him email@example.com.
Steve will do his best to respond to your message in the next column, but he won’t be able to reply to everyone or correspond with readers personally. Nothing in his answers constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free pension help to the public. It can be found here and his number is 0800 011 3797.
Stevee gets a lot of questions about state pension forecasts and COPE – Contractual Pension Equivalent. If you write to Steve about this topic, he answers a typical question from a reader here. It includes links to several of Steve’s previous columns on state pension projections and contracts that you may find helpful.
Some links in this article may be affiliate links. If you click on them, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow commercial relationships to influence our editorial independence.