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Defer state pension for an extra £40,300

Investors reaching state pension age before April 2016 should consider deferring state pension for generous government backed uplifts.

Retiring (or already retired) before 2016? Expect to live a long time? You probably won't see investment returns beat state pension deferral.

Until April 2016, pensioners who delay taking their state pension get a generous 10.4 per cent boost to state pension for every year deferred. So you only have to live for 9 years to benefit from the decision.

The rate is twice what you can expect in returns from investing in equities - and is guaranteed by the government. It might be an attractive proposition for someone in good health with substantial private savings to replace the state pension for the years they defer or who is willing to carry on working.

The obvious risk is that you die before taking your pension and miss out on the income that you could have taken. However, the benefits can amount to an additional £1,640 of guaranteed and inflation protected income every year, which FidelityWorldwide Investment calculates could be an extra £40,300 income over an average lifetime.

Even if you have already started taking your state pension, you can suspend taking it and benefit from deferral increases.

Fidelity estimates that the optimum period is 7 years' deferral. Just deferring for two years could net individual retirees an extra £19,000 of guaranteed lifetime income.

Should circumstances change during a lengthy period of deferral - for example ill health or a requirement for immedicate capital over later income, the missed payments are not lost. A retire can still choose to take them as a cash lump sum taxed at current income tax rate instead of an enhanced pension, provided they have deferred for more than 12 months.

Men born before 6 April 1951 or women born before 6 April 1953 are eligible for the 10.4 per cent deferral rate. But keep your decision to defer under review in case the terms change. Younger people will receive a less generous rate of increase for deferring state pension of 5.8 per cent.

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You can listen to Alan Higham, retirement director at Fidelity Worldwide Investment explaining the benefits of state pension deferral on the IC Personal Finance podcast from Friday 12 July. Listen to it for free at www.investorschronicle.co.uk/podcast.