Why you should think twice about deferring the state pension
Research has called into question the merits of deferring the state pension.
24th February 2020 07:19
by Kyle Caldwell from interactive investor
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Research has called into question the merits of deferring the state pension.
New research has called into question the merits of deferring the state pension if the triple lock is retained for the next 15 years.
Analysis by pensions firm NFU Mutual calculated that someone retiring today and forgoing the state pension for a year would not reap the rewards of doing so until they are 81.
For every nine weeks deferred, the weekly state pension amount rises by 1%. For a full year’s deferral, subsequent payments increase by 5.8%, which amounts to an extra £9.78 per week for life).
The calculations assume the triple lock remains in place and therefore the state pension increases by at least 2.5% a year.
However, there are certainly no guarantees the triple lock will remain indefinitely, given it is an expensive policy for the government to maintain. In 2017 the Conservative Party toyed with the idea of reforming the triple lock to make it less generous, but following the June 2017 election (in which the Conservative Party failed to secure an outright majority) the triple lock was maintained.
An example of someone who turns 66 after 1st October and defers for 12 months
Year | Age | Increase | Full new state pension | Delayed for a year (5.8% increase) | Difference per annum | Total difference |
2019/20 | 65 | £8,767.20 | ||||
20/21 | 66 | 3.9% | £9,109.12 | -£9,109.12 | ||
21/22 | 67 | 2.5% | £9,336.85 | £9,878.39 | £541.54 | -£8,567.58 |
22/23 | 68 | 2.5% | £9,570.27 | £10,125.35 | £555.08 | -£8,012.51 |
23/24 | 69 | 2.5% | £9,809.53 | £10,378.48 | £568.95 | -£7,443.56 |
24/25 | 70 | 2.5% | £10,054.76 | £10,637.94 | £583.18 | -£6,860.38 |
25/26 | 71 | 2.5% | £10,306.13 | £10,903.89 | £597.76 | -£6,262.62 |
26/27 | 72 | 2.5% | £10,563.79 | £11,176.49 | £612.70 | -£5,649.92 |
27/28 | 73 | 2.5% | £10,827.88 | £11,455.90 | £628.02 | -£5,021.91 |
28/29 | 74 | 2.5% | £11,098.58 | £11,742.30 | £643.72 | -£4,378.19 |
29/30 | 75 | 2.5% | £11,376.04 | £12,035.85 | £659.81 | -£3,718.38 |
30/31 | 76 | 2.5% | £11,660.44 | £12,336.75 | £676.31 | -£3,042.07 |
31/32 | 77 | 2.5% | £11,951.96 | £12,645.17 | £693.21 | -£2,348.86 |
32/33 | 78 | 2.5% | £12,250.75 | £12,961.30 | £710.54 | -£1,638.32 |
33/34 | 79 | 2.5% | £12,557.02 | £13,285.33 | £728.31 | -£910.01 |
34/35 | 80 | 2.5% | £12,870.95 | £13,617.46 | £746.52 | -£163.49 |
35/36 | 81 | 2.5% | £13,192.72 | £13,957.90 | £765.18 | £601.69 |
36/37 | 82 | 2.5% | £13,522.54 | £14,306.85 | £784.31 | £1,385.99 |
37/38 | 83 | 2.5% | £13,860.60 | £14,664.52 | £803.92 | £2,189.91 |
38/39 | 84 | 2.5% | £14,207.12 | £15,031.13 | £824.01 | £3,013.92 |
39/40 | 85 | 2.5% | £14,562.30 | £15,406.91 | £844.61 | £3,858.53 |
Martin Ansell, pension expert at NFU Mutual, notes: “Deferring the state pension is essentially a gamble on your own life expectancy.
“It could be worth considering for healthy people, but if you don’t need the money, an alternative would be taking the cash and investing it wisely.”
That said, deferring the state pension is widely viewed as a useful exercise for those working past state pension age – particularly those in good health – as Ansell notes.
As former pension minister Steve Webb has previously observed in his monthly Money Observer column, those who continue working and are also receiving the state pension arepotentially paying unnecessary amounts of income tax. Anyone earning more than the personal allowance (which in the 2019/20 tax year stands at £12,500) would pay tax on the whole of their state pension.
For those in this position, deferring could make financial sense.
Since the turn of the century, the number of workers aged 65 or older has risen dramatically, from under 500,000 to around 1.1 million in 2017. Of those, around 950,000 – over 85% – were also drawing a pension.
Webb adds: “Those who have worked hard to build up a state pension through their working life do not want to see a big chunk of it disappear in unnecessary taxation. The government should be doing more to alert this group to the option of deferring, as current publicity is clearly not working.”
To start receiving the state pension, you have to actively claim it. See https://www.gov.uk/new-state-pension/how-to-claim for the various ways to do this. To defer your state pension if you have not already started taking it, simply do nothing.
To halt payments if you have already started to receive the state pension, contact the Department for Work & Pensions and ask for it to be suspended. You can resume payments again at any time.
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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