Is it ever worth deferring the State Pension and how much extra income might you receive if you do so? This articles explains the pros and cons of pension deferral.
What does deferring the State Pension mean?
You do not get your State Pension automatically, you have to claim it. If you do not claim it at State Pension Age, it is deferred.
Under the new State Pension rules your entitlement will increase if you defer for at least 9 weeks. The rate of increase is 1% for every 9 weeks you defer (equivalent to 5.8% for every 52 weeks).
You will not receive any increase from deferring your State Pension if you are receiving certain benefits (eg pension credit, carer’s allowance, employment support allowance).
You will also not receive any increase from deferring your State Pension if your partner is receiving certain means-tested benefits (eg income support, pension credit, universal credit).
Any additional State Pension you receive will affect entitlement to means-tested benefits such as pension credit.
If you have deferred your State Pension, then you will not receive the Winter Fuel Payment automatically so you will have to remember to claim this.
You can opt to defer your State Pension even after you have started receiving it (if, for example, you have returned to the workplace for a time). But you can only do this once.
Should you defer taking your State Pension?
Deferring State Pension is essentially choosing to give up income at State Pension Age for a period of time, in return for a small increase in income from then for the rest of your life.
So, someone could give up the full rate of new State Pension (£203.85 ) from State Pension Age for 9 weeks (=£1,834.65 ) in return for an extra £2.04 per week for the rest of their life.
Whether they benefit from this option or not will obviously depend on an unknown factor – how long they will live.
Someone in poor health or otherwise with lower life expectancy than average will be less likely to benefit from this option, someone who lives longer than average will probably benefit.
The terms of the option (increase of 1% for every 9 weeks deferred) generally reflect current expectations of life expectancy, so that it is expected to be broadly neutral on average.
A factor that can increase the option’s attractiveness, is if you are still working at State Pension Age and will drop to a lower tax band in the future. In these circumstances, you can reduce your lifetime tax bill by deferring and consequently increase the likelihood of benefitting overall.
As noted above, deferring State Pension can impact on your eligibility for means-tested benefits such as the Pension Credit and, if applicable, this could make the option particularly unattractive.
Because there is no increase if the State Pension is deferred for less than 9 weeks, it obviously makes sense to defer for at least this length of time if not drawing it at State Pension Age.
Also, because the increase from deferring is only uprated in line with prices (and not the triple lock), it can be beneficial to wait until the start of the next financial year rather than drawing the State Pension towards the end of a financial year.