Is it worth deferring my state pension?

Telegraph

2 days ago

A little-known secret about your state pension is that delaying when you start taking your payments could mean getting higher amount when you do decide to claim. If you live a long time, it 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 from state pension deferrals, how it affects you and the best ways to avoid some significant drawbacks.
What is deferring your state pension?
Am I eligible and how does it work?
How much would I get?
Is deferring still worth it?
State pension deferral FAQs
What is deferring your state pension?
Deferring your state pension is when you decide to wait beyond your state pension age to claim it. People currently reach the state pension age on their 66th birthday.
For every nine weeks you wait, you'll get an extra 1pc on top of your original payment when you do come to claim it.
Benefits of deferring your state pension
There are some major benefits to deferring:
Higher payments. The 1pc for every nine weeks 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.
Your payments will increase each year. Under the triple lock, this extra amount you're receiving will also increase each year by at least 2.5pc. Due to higher inflation, it actually increased by 8.5pc last year and will rise 4.1pc from April 2025.
Potential tax savings. You might pay less in tax if your income drops before you claim your state pension. For instance, if you're earning over £50,270 a year, you'd pay 40pc tax on your state pension. If you waited until your income was lower, such as by stopping work, you'd pay less tax.
Drawbacks of deferring your state pension
There are some major potential pitfalls to deferring and you'll need to consider these:
Getting less money overall. The state pension changes each year, but it's generally accepted that it takes between 19 and 20 years from state pension age to break even if you defer, regardless of how many years you defer for. If you die before then, you could end up receiving less money than if you'd started claiming payments as soon as you reached state pension age.
A lower income before you claim. You will have less money during the time you defer and if you claim before the end of a nine week period, you won't qualify for that specific 1pc increase.
Figures from the Office for National Statistics (ONS) imply that deferring is something of a gamble. Its online calculator suggests that the average 65-year-old men could can expect to live further 20 years, to 85, and 65-year-old women a further 22 years, to 87.
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.
However, it's important to remember that you're not committed to deferring your state pension. If you change your mind, you can just claim it.
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 can be done online, over the phone or by post, but you should get a letter explaining all this shortly before you reach state pension age. If you haven't reached it yet, our state pension age calculator can help you find out when this will be.
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?
Currently, you would get an extra £2.30 a week, or £120 a year, for every nine weeks you defer. This is because the full state pension for people who reach retirement age after April 2016 is £230.25 per week, or around £11,973 per year for 2025-26.
If you deferred for a full year, the 5.8pc increase would add an extra £694 to what you'd receive annually.
Alternatively, you can look at it as giving you around £13.35 a week extra.
How long can I defer my pension for?
You can defer your state pension payments for as long as you like. As state pension payments won't begin until you make a claim, the length of time you defer for is entirely in your hands.
The key is working out when the best time to claim is – this will depend on your other income, whether you're keen to minimise tax, and whether you're concerned about potentially missing out on any of the benefit you're entitled to.
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. If your only income was your state pension, you could even pay no tax at all.
Natalie Kempster, of financial planner Argentis Wealth Management, said: 'Someone earning £150,000 per year would effectively pay 45pc tax on their state pension, meaning that they would net just £6,326. 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, especially if it's that gain alone that pushes you into the next tax bracket.
Is deferring still worth it?
Some people think this depends on which state pension they receive.
Under the 'old' pre-2016 state pension system, many people deferred 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, of wealth manager St James's Place, said that compared to the old state pension, the extra amount you get from deferring the new state pension had nearly halved – the uplift for deferring dropped from 10.4pc to 5.8pc.
Andrew Tully, of Nucleus Financial, said an alternative to deferring could be to take your payments 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 actually live.
State pension deferral 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 restart your pension, you cannot pause it again.
You'll need to start the deferral yourself by contacting the Pension Service.
Can I defer if I'm still working?
Yes. Whether you're working or not has no bearing on deferring, or claiming, your state pension. As long as you've reached your state pension age, the decision is up to you.
However, as mentioned before, there may be a tax advantage to deferring if you still have a regular income from work.
What if I'm on the old state pension?
If you're eligible for the old state pension, you are probably already receiving it. As above, you can still decide to defer it if you haven't already done so 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 opt for 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?
You can still defer. 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 level they were at when you either reached state pension age or moved abroad, whichever is later.
What happens when I die?
This depends on which state pension you receive. 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 on or after this date, they can't.
Our guide to what happens to your pension when you die can explain more.