How the UK govt TRAPS pensioners!

Explore whether pension deferral is beneficial in the UK and the US. Understand why deferring your pension might make you financially worse off, and learn strategies to avoid this potential trap.

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[IncomeBoost]

Thank you all for your comments!
I've observed several similar queries in the comments, and I thought it would be useful to clarify a few matters:

The comparison presumes all other factors remain constant – it's entirely based on the total sum claimed over a person's lifetime in the two scenarios. Of course, individual circumstances differ, and therefore, the most suitable course of action will vary accordingly. For instance, one might be contemplating whether to retire and start claiming the state pension, or to delay it while continuing to work? Or, there could be another situation where someone has already retired (and is utilising a private pension, ISA, etc.) and is deciding whether it's more beneficial to start claiming now or to delay.

Hence, it's essential to utilise a 'like for like' comparison – for example, a comparable situation could be working an additional 5 years while starting to claim the state pension at the outset versus working 5 years and delaying the claim until the end, resulting in a higher pension payout. On the contrary, it wouldn't be logical to compare the total income from 5 years of extra work and deferred pension versus ceasing work immediately and beginning to claim the state pension.

I realise this might seem straightforward, but I've noticed some comments alluding to this, so it's vital to make things clear.

Now, in terms of the tax situation if you continue to work and claim the state pension, you might be subject to higher taxes as state pension income is taxable. However, if you don't require the state pension, you can invest an equivalent amount into a private pension and receive tax relief on your earnings. Over time, your private pension accumulates, and 25% of the amounts withdrawn are exempt from tax. This aspect wasn't discussed in the video because it was solely focused on the comparison between claiming now versus deferring, disregarding personal circumstances due to their infinite variations.

Lastly, if you anticipate a high life expectancy, deferring may be advantageous, but note that under the new pension rules, it takes over 17 years to recover one year of deferral. Hence, in the video, you might have noticed that you may be marginally better off if you delay a year or two at the assumed life expectancy. If you live longer, you'll see the curve shift into the positive zone, meaning you're better off. Then there's a sweet spot between deferring enough to get a boost and not too much that you don't have enough time to reap the benefits. Thanks again for stopping by 🙂

[johnawara]

I believe the retirement crisis will get even worse. Many struggle to save due to low wages, rising prices, and exorbitant rents. With homeownership becoming unattainable for middle-class Americans, they may not have a home to rely on for retirement either.

[lindagray]

I worked from age 14 till retirement at 68 through an injury that crushed 4 vertebrae in my neck. I took governments advice in my 30’s and paid into a private pension scheme. I now receive state pension plus private one, that’s taxed!!! Im 76 divorced living on my own. As such I’m not entitled to benefits of any kind, even though I can’t turn my head any longer due to my crushed vertebrae, so had to give up driving. What makes my blood boil is younger neighbours living freely off the state ( our taxes ) who are better off financially than I am 👹

[KevinMorrison-xjbt]

We retired to Cyprus 20 years ago, and it's the best thing we ever did financially and health wise, and pay peanuts in income tax on our pension's ! So the best thing to do is escape from the 'YUK' ASAP when you retire ! Oh our Council Tax is only €170 a YEAR and we get our bin emptied twice a week !

[chrisw]

I think there is also another element in the UK, the current tax allowance is £12, 750 meaning an increase that defers above this will be subject to tax, so in your 5-year example the increased pension of £13674 would result in £974 being subject to tax meaning for a standard rate taxpayer it is only resulting in a net amount of £780. This could get worse if the increase in personal tax allowance does not keep up with the annual rise in pensions.

[johndoe-qgjp]

Take your pension ASAP👍🏾💯
Do not defer F- ALL!
You don't know how long you're going to live!

[limyrob]

I took my pension at the first opportunity and advice anyone who will listen to do the same:
Once "in payment" the legal status changes and it is very hard for changes to be made, changes will apply to those who have yet to draw their pension but not those who have.
Index linked increases apply each year and add up so the earlier you start the pension the more increases you get. This applies more to final salary schemes.
What if your health declines and you can no longer do the activities / travel you planned? Money early in retirement is much more useful than money late in retirement.
For inheritance tax purposes late life income is a problem, you want to be spending and drawing down savings to avoid IHT.

[raylp]

If income is over £12570 then there's 20% Tax charge on money over the tax allowance

[bluenose]

When you pay all your Nat insurance stamps you get your full Pension if you DONT pay all your stamps its made up to full pension with pension CREDITS which is a Benefit this entitles you to more Benefits so becoming better off than people who have paid ALL there stamps is this FAIR

[BrentsHowells]

Buying stocks might seem easy, but picking the right one without a solid plan is tough. I've been trying to grow my $100K portfolio, but the tricky part is not having clear plans for when to buy and sell. Any tips on this would really help.

[sylviadugdale]

I would BESEECH everyone to take pension as soon as possible as you never know what lies round the next corner my parents died at60 and two brothers as well another had major stroke

[gamingtonight]

Because of the well talked about 10% rise for pensions, I, as a new pensioner, found myself earning £2 too much to get Pension Credit, an extra £210 payment. I wonder how many new pensioners, like me, are finding the reason why the government was okay giving the 10%!

[bertiesworld]

I've always worked on the assumption that cash is better in my pocket than someone else. I have control of what that money does.

[spindelnett]

After the Robert Maxwell pension scheme theft decades back, I just stuck with a state pension. Seeing the employment trap of 'work until you're useless', I burnt my bridges and bought a small acreage at age 45. Planted woodland and orchard, eventually got lawful residence under the Four Year Rule, and now have started coppicing my first trees after 18 years. Free heating fuel for life, offgrid solar, springwater supply and even though I've only managed 60% of my N.I. contributions, the other 40% would have been lost to bills in a conventional residence, so I haven't lost out. Less is more.

[paulg]

I could be wrong, but I think you’ve also missed the fact that if you claim early, you can also invest that early realized cash. So the 10k6 payments will effectively be larger for your comparison.

[roseannallan]

My mother and father always told me never take out a private pention I never did and was glad I didn’t

[michaelc]

It pensioners that have made this country so leave us senior citizens alone we have earned are pension and have payed it in so we are only getting back what we deserve

[keithwilkins]

There is another hidden poverty trap ----Many OAP who are on pension credit still have to pay maintenance charges on owner occupied flats .That could be £50.00 per week with no financial help .

[tedthesailor]

I worked this out in 5 minutes with pen and paper as I reached 65. I wish my state pension was over 10 grand, though. Fortunately I have an occupational pension as well...

[MultiZero]

When I left school at 15 just before my 16 th birthday. I started working full time with the contract with the government that I would retire at 60 and get my pension.
My mum worked all her life to, she was the last year that women got a pension at 60.
She died that very year after working all her life and paying a full stamp.