Deferring your state pension
By Paul Davies
Deferring your state pension
Find out whether it's worth delaying your state pension. Which? outlines the pros and cons to help you decide.
Although you can't start taking your state pension before state pension age (63 for women and age 65 for men in 2015/16), you can delay when you start receiving it.
Doing so could result in you receiving a higher weekly state pension, or even a lump-sum payment.
You can defer your pension for as long as you want, but you must defer the whole thing – basic state pension plus any additional state pension you've built up.
You can start deferring your pension even if you've already started drawing it, in order to earn extra money from it.
This guide explains how it works and whether or not you'll actually be any better off.
Go further: Working past state retirement age - an extensive list of things to consider
Deferring your state pension - the basics
If you want to try to boost your state pension by delaying when you receive it, you'll have to put off claiming it for at least five weeks.
For every five weeks you defer, you'll get a pension increase of 1%. This works out at 10.4% for every full year.
- If you've hit state pension age before 6 April 2016 and just received the basic state pension of £119.30 a week, over a year you'd earn £6,203.60.
- Deferring for a year will see you increase your annual state pension to £6,848.77, or £131.71 a week, an increase of £645 a year.
The extra amount will be taxed in the same way as the rest of your state pension.
For people qualifying for the state pension after April 2016, the rate of annual increase falls from 10.4% to 5.8%, making the offer less attractive. These people will have to live for around 17 years to benefit from the decision to defer for one year, compared with an extra 10 years at the current rate of interest.
Taking your pension as a lump sum
You can delay taking your state pension and receive it as lump sum, but you'll have to defer for at least a year in order to get the lump sum payment. For those qualifying for the state pension on or after 6 April 2016, this option disappears.
It's worked out as if you had put the deferred pension into a savings account where it earned 2% above the base rate (currently 0.5%) using a compound interest calculation.
- So if you've hit state pension age before 6 April 2016 and just received the basic state pension of £119.30 a week, over a year you'd earn £6,203.60.
- Deferring for a year will see you able to take a lump sum of around £6,359.
Like the extra pension, the lump sum is also taxable, but only at the top rate you were paying beforehand. You won't move into a higher tax bracket.
Go further: Tax in retirement - find out how much tax you have to pay once you've stopped working
Should you defer your state pension?
If you have retirement income from other places, such as a workplace pension scheme, deferring your state pension might be a good deal - you could treat it like a really good savings account.
Deferring may also appeal if you've retired to a country where your state pension isn't subject to the UK's annual increases, such as Australia.
However, deferring your state pension for a year only really pays off around nine or 10 years after you decided to take your pension, increasing to 17 years after April 2016. You're giving up more than £6,000 in income each year, so it will take some time for that to build back up again.
Take your health into consideration - if you're fit and healthy, you could end up with much more money as you get older.
Go further: How much money will I need in retirement? - this guide will help you plan a budget
Deferring your state pension and benefits
Claiming extra state pension will affect any benefits you receive, such as pension credit, house benefit and council-tax reduction. This is because the extra amount you get counts as income. However, if you decide to take a lump sum, these benefits won’t be affected.
If you’re deferring your state pension, you won’t build up any lump sum or extra pension for the days you're receiving any of the following benefits:
- income support
- pension credit
- employment support allowance
- jobseeker’s allowance
- carer's allowance
- incapacity benefit
- severe disablement allowance
- widow’s pension
- widowed mother’s allowance
- any type of state pension.
Should I take extra income or a lump sum?
This all depends on your circumstances and what you want to spend the money on.
The extra pension offers the best deal at the moment, as the interest rate on offer - at 10.4% a year (falling to 5.8% in 2016) - far outstrips anything you could earn on a savings account.
However, if you're in receipt of any of the above benefits, you might want to think carefully about taking the extra income in case they’re affected.
- Last updated: April 2016
- Updated by: Paul Davies