A reader has not taken their state pension despite being 75 – they are wondering who can inherit the money if they die…
Do you have a financial anxiety, dilemma or quandary? Ask Jessie Hewitson, veteran money journalist and editor, and financial agony aunt for The i Paper. Email questions to [email protected], with Ask Jessie in the subject line and she will get to work.
I.C. , a reader asks:
I retired at the age of 60 in 2010 on the ‘old’ state pension. I have deferred this pension for 15 years. As it attracted an interest rate of 2.5 per cent on top of the base rate, it seemed a good option.
If I leave the money, what would happen if I die? Would the money pass over to my husband? And if I pass away before my husband, will it go to him or my children? If not then I guess I have to rethink things.
Jessie replies….
As someone who is pretty awful at saving even though I know all the reasons why it’s important, I admire your self-control.
Perhaps I tend to live too much in the now, and I am wondering if you live too much in the future. And while I need to be more like you, it’s also time for you to be a bit more like me.
We talk a lot about the need to save, but we tend not to talk enough in the personal finance pages when the right time to spend is. And I’m here to tell you: start spending.
Because if your husband dies before you, you aren’t going to be able to leave much of your deferred pension money, which now could be worth as much as £100,000, to your children. They will only be able to claim three months of your state pension.
You have two options to claim the extra amount: take the money as a lump sum, which covers the 15 years of pension money you didn’t receive, plus 2 per cent above the Bank’s rate of interest.
Or you can start receiving your regular state pension boosted by this extra state pension money. This will be equivalent to a 10.4 per cent increase each year the pension money was deferred.
David Gibb, chartered financial planner at the wealth manager Quilter Cheviot, has calculated that you are entitled to £275.25 per week, or £14,313 a year. This assumes that you would have received the maximum (old) state pension amount when you retired.
If you go for this weekly option you will need to live for another 7.5 years to make up for the deferred money, according to David’s calculator. Essentially, it’s a bit of a gamble on how long you will live for and if you have health concerns taking the lump sum could make sense.
In terms of tax, the lump sum is treated differently in that it won’t push you into a higher tax bracket. You will be taxed at the rate you pay without it.
So if you don’t pay tax as your pension and any other income is below the personal allowance of £12,570 a year, you won’t pay tax no matter how big the lump sum is. But if you are a basic rate tax payer, you will pay 20 per cent.
If you take it out as a weekly amount, you will automatically trigger income tax. This is because you will be receiving £14,313 a year, so you will pay 20 per cent tax for the £1,500 or so income you are receiving above the personal allowance. You will have to file a self-assessment form with HMRC or they may send you a simple assessment to fill in.
For readers wondering if deferring is a good option, it isn’t always.
People often defer if they are still working while getting the state pension to reduce the size of the cheque they have to write to the taxman. They wait to get the money at a a time when they aren’t earning, so their taxable income is lower.
Helen Morrissey, head of retirement analysis for Hargreaves Lansdown, cautions against deferring too long as it can mean paying tax when you wouldn’t otherwise, or being pushed into a higher tax bracket. Also because not claiming the state pension can rule a person out of pension credits, the gateway to the winter fuel allowance.
Quilter’s Gibb adds that generally his advice is to defer if you are still working, but not otherwise. “Early stages of retirement can be the time you need the money, as you can’t spend it in a care home,” he points out.
The secret to being sensible about money is knowing when to save and when to spend. Get the balance right and you will get maximum happiness. Get it wrong – as I usually do – and the result can be stress.
We tend to see it all in a binary way: are you a spender or a saver? we ask. When really we should be a combination of us both. Sometimes a saver and sometimes a spender, depending on our time of life.
