The best risk free investment for pensioners is about to change
We are approaching the fourth anniversary of The Bank of England Base Rate being reduced to just 0.5%. People with large amounts of cash savings have been hard hit as interest rates on their accounts have been at the lowest in living memory and seen inflation eroding the value of their capital.
Some people have used these savings to generate a higher return through installing solar panels on their roofs, and yet for those already receiving State Pensions, perhaps the best risk free investment has been overlooked.
Most people are aware that, at State Pension Age, you can defer drawing your State Pension and either take an increased pension later on, or receive it as a lump sum with (currently) 2.5% p.a. interest added, although this is subject to income tax. What many people don’t realise is first, just how generous the accrual rate of deferred pension is, and second, that you can defer you State Pension (once) at any time.
Currently the accrual rate of deferred State Pension is 1% for every five weeks that you defer it – that’s 10.4% per annum indexed in line with State Pension. To buy the equivalent annuity you would need more than three times the amount of income that you have given up!¹ The only risk attached to this is that you might die before drawing your pension, although your spouse will probably benefit from an increase in her resulting State Pension.
Joe with £30,000 in a savings account on a State Pension of £6,000 a year could defer his State Pension for five years, spending his savings to replace the pension, and receive a State Pension of £9,840 per annum plus any inflationary increases over that period. Using the Money Advice Service website, we calculated that you would need £116,500 to buy the equivalent annuity!¹
Act now! It is proposed in draft pension legislation currently out for consultation that the rate of accrual of deferred State Pension is reduced. The Pension Advisory Service suggests that it might change to 1% for every 10 weeks of deferral with no option to take a lump sum.² Even at this reduced rate of accrual, deferring your State Pension could be attractive.
A word of caution
It is important that you retain sufficient cash savings for unforeseen emergencies and expenditure and speak with a qualified Independent Financial Adviser before to see how deferral of your State Pension might affect things such as your tax position. This blog should not be construed as giving Financial Advice, merely highlighting a potential opportunity and potential change I legislation.
¹Source Money Advice Service, assuming male born 01.03.1948 deferring pension to age 70, married to wife 3 years younger, both non-smokers in good health.