This blog entry is about my strategy for maximising my state pension. I’m making the entry for anyone else in my position — that is with a low income but spare cash, or a partner with a higher income, which means that they are not forced to claim their state pension at the first opportunity and who has reached, or is reaching state pension age before 6th April 2016 when the single tier pension comes in. Mostly they will be like me: women in their early sixties. If you are like me, there are a number of tax concessions available. The question is how to best utilise them:
I’m not poor; I have cash and property and my husband has a good income, but my personal taxable income is well below the personal allowance now that it is £10,000.
I reach the state pensionable age in March next year. If I take my pension then it will raise my income above the personal allowance and I will have to pay some tax. But, if I defer taking the pension I can utilise two tax concessions to increase my income meanwhile.
The first is the cash added to a Stakeholder Pension by the government, even if you are a non-taxpayer. If I invest £2,880 the government will make it up to £3,600. I can take the whole lot out as cash using the ‘small pot’ rule, making a profit of £720 in the 2014/2015 tax year.
Next year, 2015/2016, I can do the same thing again, but I will also be able to utilise the transferable tax allowance for married couples which will be available for the first time in the 15/16 tax year. I will be able to transfer £1,050 of my unused tax allowance to my husband, reducing his tax bill by £210. So my ‘profit’ for 15/16 will be £720 + £210 = £930.
Then I repeat in the tax years 16/17 and 17/18. My total gains over the four tax years will amount to £3,510, which I would not have made if I’d not deferred taking my state pension.
Then I will claim my state pension at the start of the 18/19 tax year, by which time I will be sixty five and a half, I will have deferred my pension for a total of three years, four weeks. You get an increase of 1% for every five weeks deferral, so my pension will be increased by 31%, an extra £1,823 p.a at current rates.
It will be nearly ten years before the total extra money I’ve been paid in pension is more than the pension money I would have got between March 2015 and April 2018 if I hadn’t deferred, and by that time I will be 75. But, actuarial tables tell me that my life expectancy as a healthy 62 year old is 87 years old. If I live that long, the deferral will have gained me an extra £22,000 in state pension over my lifetime. My mother is a reasonably hale 88, which encourages me to hope that I may even live longer.
There is one other offer being made by the government to people in my position, which is the Class 3A National Insurance Contribution. I’m considering it, but it isn’t very attractive to me at the moment. It doesn’t help that the gov.uk online calculator isn’t currently working. But, according to the information that is available, the latest date for paying in will be April 2017. At that date I will be 64 and the online table states that a 64 year old will have to pay £913 for every extra £1 in pension. To get the full extra £25 a week I’d have to invest £23,075. That’s an inflation proofed return of 5.69%, which compares well with buying an annuity, but not so well with deferral. Every calculation I do suggests that anyone who has the cash to invest in Class 3A contributions would be better off using the money to subsist on while they defer their state pension for a period. I’d love someone to explain to me what set of circumstances would make Class 3A contributions preferable to deferring, other than having deferred previously (because you are only allowed to defer once, although you can have a period of ‘deferral’ after having claimed your pension).