You can apply to claim your state pension from four months before you reach your state pension age. However, if you can get by without it for a period, the government offers the incentive of higher weekly payments when you do come to claim.
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You do not need to do anything to defer taking your state pension – if you do not claim it, it will automatically be deferred. Those who are already claiming their state pension can also choose to halt their payments and defer for a period, if they can afford to temporarily forgo their money. This can be done by contacting the Pension Service.
The benefits of deferring
The deal you will get depends on when you reached state pension age. If this was on or after 6 April 2016 (so men born after 5 April 1951 and women born after 5 April 1953) you will get an additional 1% of pension for every nine weeks that you defer. If you defer for one year this works out at a little under 5.8% and will see your annual pension of £8,296.60 (assuming you receive the full state pension) boosted by an additional £479 every year.
These figures don’t factor in inflation-linked increases however so you could get more.
Currently the state pension is protected by the so-called ‘triple lock’ which means it rises by the greater of inflation, wage growth or 2.5% every year. However, deferral increases are not protected by this guarantee and only increase in line with the consumer prices index (CPI), the government’s preferred measure of inflation.
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This means that although the state pension rose by 2.5% in April 2017, the uprated portion only rose by 1%.
People who reached state pension age before 6 April 2016, before the new state pension was introduced (so men born before 6 April 1951 and women born before 6 April 1953) get a better deal.
These individuals are entitled to an uplift of 1% for every five weeks that they defer, which takes increases to 10.4% for every full year that they defer. This will boost an annual payment of £6,359.60 (the maximum paid under the old-style basic state pension – increases don’t apply to additional state pension payments) by £661 every year. Again, this figure does not include inflation related increases which may be paid, so you may get more.
In addition to the higher rate of uplift, people that reached state pension prior to 6 April 2016 are also able to take their increase as a one-off lump sum, instead of taking a higher weekly payment. This includes interest paid at 2% above bank base rate, making it a better paying savings plan than most savings accounts.
Does deferral make sense for you?
If you’ll be better off deferring or halting payments ultimately comes down to your age and how long you expect to live.
Steven Cameron, pensions director at Aegon says: “Broadly speaking [if you reached state pension age after 6 April 2016] you would need to live a further 17 years before deferring for one year starts to make sense.”
He adds: “Under the old rate [available to those who reached state pension age before 6 April 2016] it only takes nine years to break even.”
Our examples assume a deferral period of just one year. However, if you defer your state pension for more than one year, it will take longer to recoup the money you’ve given up. According to figures from Fidelity International if you reached state pension age after 6 April 2016 and deferred your state pension for five years, it would take 20.5 years to break even.
You also need to consider whether you are prepared to give up money in the short term on the promise of more in the future.
“It’s a very personal decision,” says Mr Cameron. “It also varies by health for example. Women tend to live longer than men too so they may arguably get a better deal out of it.”
According to the ONS between 2010 to 2012 (the latest figures available) the average life expectancy at age 65 in the UK was 18.2 years for men and 20.9 for women.
This could make deferring state pension a very tempting option if you are eligible for the pre-2016 rate, but less clear cut if you are not.
Richard Parkin, head of pensions at Fidelity International says: “Based on ‘average’ life expectancy it may look like it’s worth doing. But you need to consider is it worth taking the risk?”
You also need to consider when your need for income is likely to be greater – in your 60s, or in your 80s? “On paper, it might look attractive but you may simply decide that you want the money now.”
However, your decision may not just come down to your age and an educated punt on your life expectancy. In the age of pension freedoms, where retirees have more options with regards to how they structure their retirement income, deferring your state pension may give you the opportunity to reduce your tax bill.
Mr Cameron explains: “Your state pension is classed as income from a tax point of view. This means you can use it to keep your income below the personal allowance [£11,500 for 2017/18].”
The same applies if you have a higher level of income or are still in paid employment, adds Mr Parkin. “If taking your state pension now means that you will pay more tax than if you took it in a few years’ time it’s worth considering and could be particularly useful for those who are working beyond retirement age.”
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This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.
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