Should you defer your State Pension?
Did you know that you don’t have to take your State Pension when you reach State Pension age? The majority of workers may plan to retire as soon as they’re eligible, which is currently at 66 years old, but some may continue to work past this age.
If you put off claiming your State Pension, this means you are deferring it to claim at a later date. It will automatically be deferred if you don’t actively claim it.
Delaying your State Pension claim can be beneficial, as you could end up with a bigger pot and higher payments when you do decide to draw your pension.
However, deferring your State Pension may not be a good idea for everyone, as there are pitfalls to navigate – from tax implications to life expectancies.
Here, we look into what it means to defer a State Pension and the potential pros and cons you should consider when deciding whether to defer or not.
When can you claim your State Pension?
Under the current system, men born on or after 6th April 1951 and women born on or after 6th April 1953 will be eligible to claim the new State Pension from their 66th birthday. However, the minimum age will increase to 67 years old by April 2028, and may rise another year in the decade after that.
The government should send a letter to eligible citizens at least a couple of months before they reach State Pension age, which will provide details on how to claim.
You must follow this information and make an official claim before you can receive payments – if you don’t, the government will defer them automatically. Your deferred State Pension will then increase every week until you decide to claim it.
To be able to claim the full State Pension, which is currently £10,600 a year, you must have made at least 35 years of qualifying National Insurance contributions. If you won’t have enough by the time you reach the eligible age, you could defer and look into topping up your National Insurance Contributions to boost your pension.
What happens if you defer your State Pension?
If you passively or actively choose not to claim your State Pension from the date you become eligible, your future payments should rise by the time you do claim it. The new amount will depend on how much you are entitled to claim, and how long you delay taking your pension.
You must defer for at least 9 weeks to make a difference to your payments, as new State Pension payments from 2016 will increase by 1% for this period, up to a total of 5.8% a year. This would give you an annual boost of £614.64 if you deferred for a full year, or an extra £11.82 a week – which would apply for the rest of your life.
However, deferring for a year to achieve this would mean giving up the £10,600 you could have claimed that year, so it could take at least 17 years for this extra money to even out, depending on inflation and rising interest rates.
That’s one of the main reasons why deferring State Pensions can be a gamble, as how much more you’ll receive over your retirement after deferring depends on how long you live. If you were to pass away before claiming your deferred State Pension, your beneficiaries would only receive 3 months of payments.
Is it worth deferring your State Pension?
If you intend to continue working and have a steady salary when you pass State Pension age, or have already started taking money from a private pension plan, it could well be worth deferring your state benefit to increase the payments for a later time, when you will likely need them more.
It’s worth noting that your State Pension is considered taxable income if your total earnings exceed your annual Personal Allowance, so claiming while continuing to work could push you into a higher tax bracket and spirit away more of your money.
Of course, higher pension income could later push you over a higher tax threshold, but if you wait until you’re no longer working to claim, you could fall into a lower tax bracket and enjoy more of your increased payments from deferring.
As mentioned, it takes a while to break even and for the 5.8% extra to really pay off, so the downside is that deferral may not be the best idea if you aren’t in good health.
According to the 2021 Census, the most common age at death was 86.7 years for men and 89.3 years for women, so it’s possible to recoup what you deferred.
However, you should also be aware that you can’t increase your State Pension by deferring if you (or your partner) are receiving certain state benefits. You would therefore only receive the same amount as you would if you hadn’t deferred.
You could also reduce or lose your entitlement to means-tested benefits once you begin to claim your State Pension if the uplift from deferring pushes your income over the allowance for those benefits, such as Pension Credit.
So, if you wish to give up working at State Pension age but won’t have enough income without it, you may be better off claiming.
Do you need financial planning advice?
The decision to claim or defer your State Pension is obviously a very personal one, and whether it would be beneficial for you or not depends on your individual circumstances, both at present and what can be anticipated in the future.
As many people are living longer and staying in work for longer, deferring for increased payments later can be appealing. However, you do need to make sure you consider all circumstances before committing to this, including tax obligations.
Official guidance on deferring a State Pension is available on the government website to help you with planning your retirement. If you need more in-depth assistance working out your retirement income and how best to maximise your savings for later in life, it would be best to seek professional financial planning advice.
At gbac, we can provide a range of helpful services, including private pension planning and tax planning, to ensure you get the most out of your savings and your State Pension entitlement when the time comes.