Should I defer my state pension? Which? Common Money Problems Solved - February 2015

10 February 2015

Pension campaign

In this monthly series, we share recent questions about money and the answers provided by our experts on the Which? Money Helpline.

Our experts have taken a number of calls in the last month from people who are unsure whether it would be worth delaying, or deferring, their state pension.

This is dependent on several factors including your health, age and forms of retirement income, and we often recommend speaking to an IFA about the potential risks and rewards. 

Find out more: Call the Which? Money Helpline - your financial queries answered

Advantages of state pension deferral

If you defer your state pension, you'll be able to increase the weekly amount you receive when you finally decide to take it. 

Anyone who reaches state pension age before April 2016 will get a pension increase of 1% for every five weeks they defer. This works out at 10.4% for every full year, which is a far better rate than any savings account on the market offers. 

Provided you can afford to go without your state pension for a while, delaying it could be a good method of increasing your guaranteed retirement income. Deferring a basic state pension for 12 months will see your weekly payments rise from £113.10 a week to £124.86 a week - an increase of £612 a year.

Which? members often ask our experts whether deferring their state pension will allow them to qualify for the new flat rate pension, which comes into force in April 2016. The answer is that it makes no difference, as only those who hit state pension age after the changes are introduced will get the new flat rate.

Find out more: Is it worth deferring the state pension? - we explain what you'll get out of it

Risks of state pension deferral

The main disadvantage of deferring your state pension is that you will missing out on more than £5,881 in income for each year you defer. 

Based on the extra 10.4% pension, working out at £612 a year, you would currently receive, it would be a decade before the decision to defer your state pension started to pay off, so you need to decide if it is in your interest to wait that long. 

There are also risks associated with the alternative methods of generating an income while you're deferring your state pension.

Income drawdown involves a number of charges and you might lose money if the associated investments don't perform well. Taking a lump sum from your pension could significantly lower your future monthly income and you'll be taxed if you withdraw more than 25%.   

What's more, if you reach state pension age after April 2016, the rate of annual increase will fall from 10.4% to 5.8%, making the offer less attractive. Anyone reaching state retirement age before April 2016 will continue to see their pension increased by 10.4% a year, regardless of how long they defer it.

Alternatives to state pension deferral 

From October 2015, you could boost your state pension by making a one-off voluntary national insurance contribution, known as a Class 3A NIC. 

This option will be available for anyone who has reached state pension age by 6 April 2016 and could boost the amount you receive by up to £25 a week, depending on the size of the contribution.

The cost of class 3A NICs drops as you get older. You can find out more about these costs in our guide on National Insurance rates. As with state pension deferral, we suggest discussing the pros and cons of this option with an IFA. 

Find out more: Retirement income options under the 2015 rules - all your options explained in detail