Should I begin taking my state pension? I’m 73 and work full time: STEVE WEBB replies

I officially reached retirement age in September 2017 and I have not claimed my state pension.

I am currently working full time and receiving disability benefits for life.

I would like to know if I will get full pension and if any amount will be deducted due to benefits I am receiving please.

I have paid a total of 43 years of National Insurance although I had a gap of I believe 12 or maybe 18 months.

Also, is this a good time to claim my state pension?

Steve Webb replies: I will deal first with your specific questions about your own pension and interaction with disability benefits, but then offer some thoughts on the wider question of when is a ‘good time’ to claim your state pension.

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How much state pension you will get depends on two main things: how many years you have contributed, and whether any of those years was paid at a lower ‘contracted out’ rate.

You have 43 years of contributions, and this would normally be enough for a full new state pension.

However, if at any point you were a member of a ‘contracted out’ workplace pension you would have spent some of those 43 years paying National Insurance at a reduced rate.

A deduction is made from your state pension for the ‘contracted out’ years, and this could leave you short of the standard figure.

Contributions post April 2016 (when the new system was introduced) can gradually ‘burn off’ this deduction, but I see you only had one such year before you reached pension age.

In short then, if you were never contracted out you should get a full new state pension (or possibly more), but if you were extensively contracted out you may get less. The only way to find out for sure is to contact the Pension Service.

In terms of disability benefits, drawing a state pension should not have any impact.

Specifically, if you are receiving Personal Independence Payment (or its predecessor, Disability Living Allowance) these benefits are not affected by other income, and are paid free of income tax.

Turning now to the issue of deferring taking your state pension, your ‘reward’ for each year of deferral is a 5.8 per cent boost to the rate of pension you will be paid.

If you had deferred for one year, until your 66th birthday, you could have expected to live for around 17.8 years more on average.

If we multiply the 17.8 years by a 5.8 per cent boost, we can see that you would typically get back roughly 100 per cent of one year’s pension as your reward for deferring for one year, thereby roughly breaking even.

However, when you defer for a second or further year, the reward for deferring does not go up – it is still 5.8 per cent of your base pension. 

This means that deferring becomes less good value with every passing year.

For example, you are now 73 years old. If you defer one more year before finally taking your pension, you could then expect to draw a pension for just over 12 years on average, based on the the latest projections.

But 12 lots of 5.8 per cent is well short of 100 per cent. In other words, on average, you could expect to lose out if you defer another year from now.

There are, of course, other factors to consider when deciding whether or not to defer.

If you enjoy working and plan to continue doing so, there can be tax advantages to deferral, as otherwise your state pension would be added to your wage and this could potentially push you into a higher tax bracket.

A final, and rather gloomy, observation is that you should think about the situation if you were to continue deferring and were sadly to die before receiving your state pension.

If you have no spouse then your pension would simply die with you, aside from a strange rule which would allow your heirs to make a posthumous claim on your behalf and receive three months’ worth of payments as a lump sum.

But even if you have a spouse, the provision for widows under the new state pension system is very limited.

In short, whilst I cannot advise you without full knowledge of your individual circumstances and preferences, the simple arithmetic of deferral means that, other things being equal, it becomes less attractive to defer the longer you leave it.