What's happening with the state pension in 2016? Is it worth deferring the state pension?

State pension page 4

People still also have the option to defer their state pension in order to get a higher weekly sum or a lump sum when they do decide to take it. We take you though your options if you want to defer your state pension.

How can I defer my state pension?

If you choose to delay your state pension when you reach state pension age, you can get a higher weekly state pension or a lump sum payment. How much depends on how long you defer claiming it.

You can defer your pension for as long as you want (the longer you defer the more you’ll get), but you must defer the whole amount including any additional state pension.

The rules allow you to change your mind once you’ve started receiving your state pension, meaning that you can then defer in order to earn extra money in the future.

For more: State pension explained - the Which? comprehensive guide.

What you’ll get if you opt for a weekly increase

If you want to try and boost your weekly 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.

  • 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 increase your annual state pension to £6,848.77, or £131.71 a week, an increase of £645 a year.

For people qualifying for the state pension on or after 6 April 2016, the rate of annual increase will fall from 10.4% to 5.8%, making the offer less attractive.

The extra amount will be taxed in the same way as the rest of your state pension.

What you’ll get if you opt for 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.

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.

If you qualify for the state pension from 6 April 2016 onwards, deferring for a lump sum isn't an option. 

Is it a good idea to defer my state pension?

Deferring your state pension can be a good idea if you’ve sufficient retirement income from other sources. You can treat the state pension as a savings account.

The fact that the option is less generous after April 2016 may put people off in the longer term. You’ll now have to live for around 17 years to benefit from the decision to defer for one year, compared to an extra 9 years at the current rate of interest. However, if you reached the state pension age before 6 April 2016, and choose to defer in the future, you'll still qualify for the more generous rate of 10.4%.

Delaying taking your pension for too long can eventually stop paying off as you’ll be giving up over £5,000 in income each year which will take some time to build up again. Your health will be a determining factor – there’s no point deferring if you’re in poor health.

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Last updated:

April 2016

Updated by:

Paul Davies

 

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