Is it worth deferring the State Pension? We explain the pros, cons and tax implications, and help you decide if you might benefit from delaying your State Pension payments.
Did you know that you could delay taking the State Pension, and potentially get larger payments for life? Analysis of data from the Department of Work and Pensions (DWP) reveals that two thirds of adults are unaware that they can choose to defer claiming.
If this is something you were not aware of, or are weighing up, we’ve written this guide to help you. We’ll explain how deferring your State Pension works, who it might be right for, and how long it takes you to break even.
When do you get the State Pension?
In order to qualify for the State Pension, you need to have made enough years of qualifying National Insurance contributions. For the basic State Pension you need 10 years, and for the full State Pension you need 35 years. If you qualify, you can receive the State Pension from the age of 66 (this will rise to 67 in 2028).
The current weekly amount of State Pension you will receive is:
- Basic State Pension: £184.90 a week
- Full State Pension: £241.30 a week
What does deferring the State Pension mean?
Deferring your State Pension means choosing not to claim it when you first become eligible. Instead of receiving the payments you are due immediately, you can decide to delay taking it for a period of time.
The pension you deferred is then added as an extra payment on top of your regular payment once you do start claiming. For every nine weeks you defer, you’ll get 1% added to your regular weekly pension payment for life. This works out as just under 5.8% for every year you defer.
What are the advantages of deferring the State Pension?
So why might you choose to delay claiming the State Pension? Here are some of the advantages of deferring.
You receive higher payments for the rest of your life
The main attraction of deferring is the possibility of receiving more money over the long term. If you live for many years after retirement, the increased payments could outweigh the income you missed during your deferral period.
You can potentially save money on tax
If you continue working after reaching the State Pension age, claiming your pension immediately could push you into a higher tax bracket. Delaying payments until your employment income falls can help to reduce your tax exposure.
It give you more flexibility when planning your retirement
If you have workplace pensions, investments or savings you may decide to use those assets first and postpone claiming the State Pension to secure yourself a higher guaranteed income later in life.
What are the disadvantages of deferring the State Pension?
And here are some of the disadvantages of deferring the State Pension.
You miss payments while you are waiting
The biggest drawback of delaying claiming the State Pension is that you receive no money from it during that time. If you need that income for living costs, delaying it may not make financial sense.
It can take years to break even
While an extra 5.8% on your State Pension might sound attractive, the reality is that it can take many years before the increased payments compensate for the income you lost while deferring. Using the current State Pension figures, deferring for one year would net you an extra £728 a year for life. However, to get this you would have given up £12,547.
According to Money Saving Expert, if you defer the State Pension for any amount of time, you would need to live for around 20 years to break even.
If you don’t have good health, it’s not worth it
If you have health concerns or a shorter expected lifespan, taking payments earlier could result in receiving more overall value. If you want to get some idea whether you might live long enough to benefit from deferring, the Office of National Statistics (ONS) has created a life expectancy calculator.
Who could benefit most from deferring the State Pension?
You might consider deferring the State Pension if you:
- Are still earning a salary
- Have other retirement income sources
- Are in good health and expect to live a long life
- Are looking to increase your guaranteed income later in life
Deferring the State Pension might not be the right choice for you if you:
- Need immediate income
- Have significant health concerns
- Don’t have any other savings
Questions to ask before deciding whether to defer the State Pension
Before delaying the State Pension, you need to ask yourself these questions:
- Do I need the money now?
- Am I still working?
- How long am I likely to rely on retirement income?
- Will delaying give me any tax benefits?
- Do I have enough savings to bridge the gap?
Think carefully before deferring the State Pension
Deferring the State Pension can be helpful for some retirees, but it is not automatically the best choice for everyone. Deciding whether or not you should delay claiming it will come down to balancing your immediate financial needs against the possibility of larger future payments.
If you have other income sources and are planning a long retirement, waiting to take the State Pension could give you extra long-term security. However, if you don’t enjoy robust health and would struggle to get by without the money, delaying the State Pension might not be the right decision for you.
Carefully reviewing your finances and retirement plans can help you decide whether deferring the State Pension is worth it for you.
