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5 Feb 2020

Why are thousands choosing to defer their state pension?

Pausing your state pension could boost your retirement wealth

More than 14,000 people chose to stop receiving their state pension in the 2018-19 tax year, government data has revealed.

The figures, obtained by Canada Life, highlight flexibility in the state pension system, which allows you to defer your state pension for as long as you want in order to boost the amount you get.

Here, Which? looks at why people are opting out of their state pension, and whether it's a good idea.

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How does state pension deferral work?

Although you can't start taking your state pension before your state pension age (SPA), which is currently 65 and gradually increasing to 66 by October 2020, you can delay when you start receiving it.

Your state pension payments will only kick in when you start claiming, so if you want to defer yours you don't need to do anything at all.

And if you've already started drawing your state pension, you can pause it in order to receive increased payments in the future. You just need to be careful about when you choose to do this, as you can only pause and restart your payments once.

Find out more: deferring your state pension

Why are people delaying their state pension?

There could be several reasons why people are deferring their state pension, but it ultimately comes down to having more money.

Choosing to defer for five weeks or more means that, once you do start claiming your state pension, you'll receive more than you otherwise would have (see below to find out how much).

However, it can also help you manage your tax liability if you don't want to be pushed into a higher income bracket.

Canada Life technical director Andrew Tully said that this could be helpful to those who don't need an income at the time, for example because they're still in paid work or have received an inheritance.

He added: 'This sort of flexibility is common in the private pension sector, where people are able to turn income on and off from pensions using the right products, but is not a well understood part of the SPA.'

How much will you get if you defer your state pension?

The amount you receive depends on whether you reached SPA before or after 6 April 2016.

If you reached SPA before this date your state pension will increase by the equivalent of 1% for every five weeks you defer. This works out at 10.4% per deferred year.

For example, if you receive £129.20 per week (the full basic state pension), you'll get an extra £13.44 a week by deferring for 52 weeks.

Alternatively, you could take a lump sum if you deferred your state pension for at least 12 months in a row. This would include interest of 2% above the Bank of England base rate, currently at 0.75%.

For people who reached SPA on or after 6 April 2016, the terms are less generous: your state pension increases by the equivalent of 1% for every nine weeks you defer. This works out at just under 5.8% for every year.

For example, if you receive £168.60 per week (the new full state pension), you'll get an extra £9.74 a week by deferring for 52 weeks.

People who reached SPA on or after 6 April 2016 aren't able to take it as a lump sum.

Annual state pension increase

It's worth mentioning that the state pension is increasing on 6 April this year due to the triple-lock system, whereby the state pension must rise by the previous September's rate of inflation, average earnings growth or 2.5% - whichever is higher.

The highest of these three measures this time round was average wage growth, at 3.9%, meaning those who receive the full single-tier state pension will get £175.20 a week; that's £6.60 extra a week.

However, cuts of up to £70 a week will also come into force this year for those who currently receive the adult dependency increase (ADI), which could vastly outweigh the increases.

Find out more:how much state pension will I get in April 2020?

Should I defer my state pension?

If you're in good health and expect to live for long enough to recoup the difference, then this is a piece of retirement planning you should consider.

The state pension is the bedrock of many people's financial plans in retirement, so the more you can get the better.

If you have retirement income from other places, such as a workplace pension, deferring your state pension could be a savvy move - you could almost treat it like a savings account.

However, if you need to rely on the state pension at your retirement age as a source of income, this system may not be for you.

Will deferring my state pension affect my benefits?

If you receive benefits such as pension credit or housing benefit, it's worth noting that these benefits may be affected by any additional pension income.

But if you reached SPA before 6 April 2016 and qualify for a lump-sum payment, your benefits won't be affected.

You need to tell the Pension Service if you're on benefits and wish to defer. You can contact them on 0800 731 0469.

Do I pay tax on a deferred state pension?

You just pay tax on pension income you're receiving, so if you've deferred yours you won't pay tax on it until you start claiming.

If you take the deferred pension as a lump sum, it's taxable at your current rate; you won't be pushed into a higher tax band because you received a lump sum.

The Department for Work and Pensions will send you a declaration form when you come to claim your lump sum, where you will have to say what rate of tax you currently pay.

HMRC will check this at the end of the tax year, and if too much tax has been deducted you'll get a refund.But if you haven't paid enough tax you'll have to make up the difference.

How to check your state pension

The amount of state pension you receive depends on when you reached SPA and the number of national insurance contributions (NICs) you've made.

You need at least 35 years of contributions to receive the full new state pension, and at least 10 years to get anything at all.

To get the full basic state pension (for those who reached SPA before April 2016) you need 30 years of NICs to get the full rate.

If you haven't reached SPA you can check your state pension forecast through the government's check your state pension website.