Is it worth deferring my state pension?

A little-known secret about your state pension is that holding off your payments could mean getting higher amount when you do decide to claim. If you live a long time, that could net you thousands of pounds.

But it doesn’t work for everyone, and there are some catches to navigate – from gambling on your own life expectancy to potential tax implications. 

Here, Telegraph Money sets out who could benefit, and how it affects you and the best way to avoid some significant drawbacks.

Is deferring worth it? 

Delaying your state pension payments can mean you’ll get more when you do come to claim, but this move isn’t suited to everyone.

Benefits of deferring state pension payments 

If you’re on the new state pension you’ll need to defer your state pension payments for at least nine weeks to benefit. Each nine weeks you put off receiving them means you get the equivalent of an extra 1pc on top of the usual payment amount when you do decide to claim.

This stacks up to 5.8pc extra a year, every year, and that’s on top of your existing payments. That means you will have more money coming in, and it’s guaranteed for life.

Under the triple lock, this extra amount will also increase each year by at least 2.5pc. Due to higher inflation, it actually increased by 10.1pc last year and will rise 8.5pc this year.

Natalie Kempster, of financial planner Argentis Wealth Management, explained: “The magic of compounding – assuming a 2.5pc increase – means that deferring for just one year would give you an extra £11,000 over 15 years, and the impact of this is exponential when you defer for longer.”

Deferring drawbacks

However, there are some major potential pitfalls to deferring, and you’ll need to carefully consider these. The most important one is that if you die before the “break even point”, you could end up receiving less money overall.

Due to the fact that the state pension changes every year, and not usually by the same amount, it’s difficult to predict with any certainty what the break even point is. It’s generally accepted that it takes between 19 and 20 years from state pension age, regardless of how many years you defer for. 

Life expectancy tables from the Office for National Statistics (ONS) imply that in this regard, deferring is something of a gamble. Its 2020 latest figures showed that 65-year-old men could can expect to live on average a further 18.3 years, to 83, and 65-year-old women a further 20.8 years, to nearly 86.

This is projected to rise to 21.9 years for men in this age bracket, and to 24.1 years for women by 2045.

What is more predictable is how this could negatively affect your tax bill, which we also discuss below.

Am I eligible and how does it work?

Anyone can defer their state pension. You don’t need to do anything, as your state pension won’t start until you actually claim it. This is done online, over the phone or by post, but you should get a letter explaining all this shortly before you reach state pension age.

There’s no maximum amount of time you can defer for, and you’ll keep building up money for every nine weeks you wait.

However, it is crucial to also bear in mind that if you or your partner are claiming certain benefits, such as Pension Credit or Universal Credit, you will not build up extra money by deferring during that time.

If you’re planning on continuing to claim those, it’s unlikely that deferral will be the right option for you.

How much would I get?

The full state pension for people who reach retirement age after April 2016 is £221.20 per week, or just over £11,500 per year for 2024-25. With the 5.8pc increase, for every year you defer your state pension, an extra £667.14 is added to what you’d receive annually.

Alternatively, you can look at it as an extra £12.83 a week.

Navigating higher tax brackets

Income from the state pension forms part of your overall taxable earnings, so there are some considerations and calculations to make.

It might be worth deferring to save yourself tax. For example, if you reach state pension age, carry on working and your income is over £50,270, you will lose 40pc of your state pension in tax if you claim it immediately. However, if you defer until you stop working, you’ll pay less tax if your total income then drops into the lower tax bracket of 20pc, or none if it drops below £12,570.

Ms Kempster added: “Someone earning £150,000 per year would effectively pay 45pc tax on their state pension, meaning that they would net just £5,830. Defer your pension until the following year, when you are retired and a basic-rate taxpayer, then the numbers start to look a whole lot more favourable.”

However, Dean Butler, Standard Life’s retail managing director, said you should also consider whether taking a higher income later (through deferring) might actually push you into the next tax band, as opposed to taking a lower income from an earlier date. This brings its own issues.

It might not be worth deferring if it means you’re then taxed at 40pc or 45pc on what you have gained if you otherwise wouldn’t be.

Is deferring still worth it?

Under the old state pension system, deferring state pension payments was something a lot of people did because there was a significant uplift to be had, and there was the option to take the deferred payments as a lump sum.

Claire Trott, retirement and planning director at St James’s Place, said since the changes in 2016 to the new flat rate state pension, the interest you accrue by deferring has nearly halved.

She said the 2016 changes have made deferral less appealing because there are more drawbacks to taking the income, which she feels “outweigh the benefits”.

Andrew Tully, technical director at Nucleus Financial, said an alternative to deferring your state pension payments could be to take them straight away and use them to invest in an Isa.

He explained: “That means you have access to that at any point, and it may grow over time.

Overall, whether it’s worth deferring your state pension is dependent on a number of factors, including your income, where you retire, your cost of living, tax implications and how long you’ll live. Although you should think these things through carefully, you can change your mind in certain circumstances.

FAQs

Can I defer if I’ve already started getting my state pension?

Yes, but only once. You can keep the deferral going for as long you like, but once you stop it, you cannot restart. You’ll need to do this yourself by contacting the Pension Service.

What if I’m on the old state pension?

If you claim the old state pension, you are likely to be already receiving it. As above, you can still decide to defer it, though – as long as you haven’t already deferred it in the past. You will get 1pc for every five weeks you defer, which works out as 10.4pc for every 52 weeks. You can take the amount you build up as a lump sum or extra regular payments.

If you’re on the new state pension, you don’t have the lump sum option.

What happens if I retire abroad?

Each year, the state pension increases by the highest of inflation, average wage increases or 2.5pc. This is known as the triple lock and it applies to the extra amount you get by deferring too. 

For this to apply however, you’ll need to live in the UK, the European Economic Area (including Switzerland) or a country with which the UK has a social security agreement (except Canada or New Zealand). 

If you live in a country that doesn’t fit the criteria, you’ll still receive the extra payments you have built up. However, they will be frozen at the same level as when you either reached state pension age or moved abroad, whichever is later.

What happens when I die?

If you reached state pension age before April 6 2016, you’re on the old state pension. This means your husband, wife or civil partner can inherit the extra payments you’ve built up, subject to certain conditions. If you get the new state pension, i.e. you reached state pension age after this date, they can’t.