Should you defer your State Pension?

If you’re lucky enough to not need your State Pension when you first reach the qualifying age (currently 66, but rising to 67 by 2028), you can choose to take your payments later. 

In return, you'll get a higher weekly amount further down the line – as much as £667 more a year in State Pension for life if you defer for 12 months.

However, even though deferring your State Pension will boost your weekly income - you might choose to do this because you’re still working or have enough income from other sources – it’s an option that many people aren’t aware of. 

According to recent research from retirement specialists the Just Group, a quarter of those surveyed aged between 55 and 64 didn’t know putting off your pension was an option.

If you like the idea of delaying your start date to boost your weekly income, we’ve spoken to financial experts to explain how it could work. But, be warned, you could end up getting less money overall.

How does State Pension deferral work?

Around two months before you reach State Pension age, you‘ll receive a letter from the government informing you that you’ll soon be eligible to claim. However, payments don’t start automatically – you must ask to start receiving your weekly pension. 

If you want to defer your State Pension, you simply don’t submit your claim. The longer you leave it, the bigger the increase you could get.

However, you cannot build up any extra pension if you or your partner are receiving certain benefits, such as Pension Credit or Carer’s Allowance - you can see the full list over at gov.uk. 

Alice Haine, Personal Finance Analyst at online investment service Best Invest, explains:

“To receive an increase, people must defer for at least nine weeks; after that their State Pension rises by about 1% for every nine weeks deferred, equivalent to just under 5.8% for every year.”

“Someone set to receive £221.20 a week from the new State Pension, who defers for 52 weeks, will receive an extra £12.82 a week – or £666.64 of additional payments across a full year - when they eventually claim the payment. 

“If there is an annual increase in the State Pension during the period they defer, then the amount they receive could be even bigger.”

What if I've already started claiming?

Even if you've already started receiving your State Pension you can still defer it (but only once). You might decide to do this, for example, if you retired but then decided to return to work. 

Depending on when you were eligible for payments, you may get a better deal for deferring. Haine says: “Those who reached State Pension age before April 6, 2016, receive a slightly more generous payout for deferring, with an extra 1% in State Pension income for every five weeks deferred, the equivalent to a weekly increase of 10.4% or £17.62 and an annual rise of £916.66.”  

“As well as being used to top up weekly payments, this can also be taken as a one-off lump sum, which includes interest of 2% above the Bank of England base rate (provided you defer for at least 12 months in a row). 

“Just remember the lump sum will be taxed at your marginal rate of income tax when you do take it.”

This means that you may need to pay tax on the extra money you receive – the amount will depend on how much taxable income you receive throughout the year.

Is it worth deferring?

The most obvious benefit of deferring your State Pension is the extra money you’ll get each week when you eventually start claiming. But it can also be a pretty tax-savvy move, in the right circumstances.

Haine explains: “Deferring...can be particularly beneficial for those that are still working and might find the State Pension payment, in addition to their regular income, pushes them into a higher tax bracket.”

So, if you’re currently earning enough to make you a higher-rate taxpayer, but think you’ll drop down to the basic rate (when you stop working, for example) - by taking your State Pension later, you’ll pay less tax on it.

However, Helen Morrissey, Head of Retirement Analysis at investment platform Hargreaves Lansdown, says you need to weigh the decision carefully. 

She points out trying estimate your life expectancy is a key part of the decision to defer.
 “You have to consider how long you’re likely to live. If you defer for 12 months this [financial] year, then you’ve given up more than £11,500,’ she says. 

Even with the near-5.8% annual uplift you'd get when you come to claim your State Pension, you could be into your eighties before you’ve recouped all the money back. 

“If you live past this point, then [deferring] can work but if your health is failing you may not get all your money back,” Morrissey adds.

Haine agrees: “Someone deferring their new State Pension would typically need to live for at least 17 years after they start claiming it before they become cash positive. For a basic State Pension, the recovery period is shorter at between nine or 10 years.”

If you’re claiming the new State Pension (which applies from April 2016 onwards) payments will stop when you die. 

If you’re on the basic State Pension (which applied before April 2016) and you’re claiming deferred pension when you die – there may be some circumstances where some of your state pension entitlement can be passed onto your partner if you’re married (or in a civil partnership) on the date of your death.

In this case, if your partner had deferred their State Pension for more than a year (and hadn’t taken it yet) you can get it as a lump sum – if they were claiming it already, you can inherit the extra weekly payments.

Are there any other options if I don’t need my State Pension yet? 

If you don’t have an urgent need for your pension, there are other ways to put that money to use, which don’t involve sacrificing income or taking a bet on how long you’ll live.

Haine says: “Rather than deferring, a retiree under the age of 75 could choose to direct the money into a private pension instead, a move that would attract tax relief at their marginal rate of income and top up their retirement savings.”

A £1,000 contribution to a pension, for example, would be worth £1,250, after basic rate tax relief  has been applied.

However, you need to be aware that if you have already made a taxable withdrawal from a private pension, the amount you can pay into it will be limited to £10,000 a year (the Money Purchase Annual Allowance).

In addition to boosting your retirement savings, if you pay the extra money into a private pension it can be passed on free of Inheritance Tax. However, if you're considering this option, it's worth talking to your pension scheme provider so you're clear how it'll work.

Take advice if you’re not sure

Working out how to structure your retirement income can be complicated and there’s lots to consider.

For that reason, if you aren’t sure whether to defer your State Pension - and especially if you're considering paying that income into another investment, such as a private pension - it's a good idea to get professional advice. 

This will help you make the most of your retirement pot and ensure your income is structured as tax-efficiently as possible.

Key Takeaways

• Deferring your State Pension can boost your income by as much as £667 a year.

• Before delaying your State Pension it’s important to think about the impact it could have on the amount of tax you pay and whether you will live long enough to recoup the income you gave up.

• You could consider boosting your retirement savings by paying your State Pension income into a private pot instead, but it’s sensible to get advice first.