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The pros and cons of deferring State Pension payments

Deferring State Pension income is an option some of us will consider as we approach retirement age. But what are the advantages and disadvantages of deferring?

While some people choose to claim their State Pension as soon as they are eligible, others defer it to secure a larger income later down the line. As with most financial decisions, there are pros and cons to weigh up before deciding which camp you intend to fall into. 

For instance, whilst deferring State Pension payments will see your eventual income increase, you should factor in the ‘cost of delay’. That’s the amount of money you will lose by deferring. You might be quite surprised by the numbers.

To help you explore this topic, we will take you through the main benefits and drawbacks of deferring State Pension income. We’ll also see what some financial experts have to say on the matter. Here’s what you can discover in today’s blog:

  • What does ‘deferring my State Pension’ mean?

  • Benefits of deferring the State Pension

  • Drawbacks to deferring your State Pension

  • What do the experts say about deferring the State Pension?

  • How do I defer my State Pension or halt my payments?

After reading through the following information, you may wish to speak to a financial adviser who can recommend whether deferring your State Pension is right for you or not. Ultimately, the decision to defer should align with your goals, values and aspirations for your retirement years.

What does ‘deferring my State Pension’ mean?

Deferring the UK State Pension involves choosing to delay the commencement of your State Pension payments. If you defer, your State Pension income will be higher when you do start to receive it.

Currently, men and women can claim the State Pension from their 66th birthday. If you were born after 5 April 1960, there will be a phased increase in the State Pension age to 67 between 2026-28.

If you already claim the State Pension then you can choose to stop claiming for however long you wish. This will boost your pension income when it restarts. However, you can only stop claiming once, so you will need to think carefully before doing so.

Benefits of deferring the State Pension

Thinking about deferring your State Pension for a while, or putting your payments on hold after already receiving them? Here are some of the main reasons why deferring may work for you.

Increased Pension Payments

If you defer your State Pension, the amount you receive in the future will be higher. How much extra money you receive – and how you receive it – depends on when you reach State Pension age.

If you reach State Pension age on or after 6 April 2016

For those receiving the new State Pension, the increase is typically around 1% for every nine weeks you defer, equivalent to roughly 5.8% for a full year.

If you are eligible for the full State Pension then for the year 2023/24 that equates to an extra £47.28 every four weeks for each full year that you defer. Of course, if the State Pension increases in the time that you defer then the amount you receive could be higher than this example.

If you reached State Pension age before 6 April 2016

For those receiving the basic State Pension, you can usually take your extra income from deferring in one of two ways:

Higher payments. If you choose the higher payments then your pension will increase by 1% for every five weeks that you defer.  If you receive the full basic State Pension then this equates to an extra £64.96 paid to you every 4 weeks if you defer for one year.

One-off lump sum payment. If you defer your State Pension for at least 12 consecutive months then you can choose to receive a lump sum payment. Your lump sum will include interest of 2% above the Bank of England base rate. If you are a taxpayer then your lump sum will be taxed at your current rate.

Defer your State Pension to minimise income tax 

Do you plan to carry on working past State Pension age? If so, you might choose to defer to minimise the amount of income tax you may otherwise incur.

Remember, if you are still earning then your Personal Allowance is likely to be used up already by your salary. This means that your full State Pension could be subject to income tax when you claim for it.

Deferring to a time in your life when you won't have career earnings could avoid or reduce this risk.

Say for example you earn £45,000 a year and pay basic rate tax of 20% on your earnings over £12,570 – your tax-free Personal Allowance. If you were to claim the State Pension from your 66th birthday without reducing your hours then your income would increase by £10,600. 

With a total annual income of £55,600, you would now have to pay the higher tax rate of 40% on your income over £50,270. 

By deferring your State Pension, you can continue to live off your usual income for as long as you wish to, paying your marginal rate of tax, while your future State Pension income gradually increases the longer you defer.

Do remember though having higher State Pension payments later on may affect your tax position when your payments eventually begin or restart.

Drawbacks to deferring your State Pension

As with any important financial decision, it’s important to weigh up the pros against the cons. There are some drawbacks of deferring your State Pension income which require careful consideration. Here are some of the main ones:

The cost of delay

Whilst deferring your State Pension or putting it on hold will see your payments increase in the future, you need to consider the ‘cost of delay’. This is the money you miss out on by deferring.

Say you are 66 and qualify for the full State Pension of £10,600 per year. If you delay commencing by a full year until you turn 67 then you might achieve a slightly higher State Pension income of £11,214.64 each year. That’s £614.64 a year more, based on your income increasing by 5.8% during those 12 months.

However, you would miss that initial year’s income of £10,600. What many people do not consider is that it would take you just over 17 years to recoup that money, by which time you’ll be 84 years old.

Bear in mind that a 66 year old man today has an average life expectancy of 85, with a 1-in-4 chance of living to 92 and 1-in-10 chance of living to 96. Life expectancy is even higher for women. 

Whichever gender you are, if you were to live past the age of 84 in this example then you effectively ‘beat the system’ by deferring for one year. As a result, you can achieve a higher overall State Pension income during your lifetime than you may have otherwise secured.

However, if you don't live long enough to benefit from the increased payments then you may miss out financially. Ultimately, the decision to defer involves predicting your life expectancy and financial needs.

Impact on means-tested State benefits

As we have discussed, for each year that you defer, you could boost your State Pension by up to £614 a year for life. However, having this higher income coming into your home could see you missing out on Pension Credit, a pension top up for people on low incomes who are over State Pension age. 

Whilst some people might find they are only eligible for a small top up through Pension Credit, it’s the extra benefits, discounts and perks that come with it that can really make the difference. 

In addition to a free TV licence and Council Tax reductions, the Government's 2023/24 cost of living payments – worth £900 – are being paid to those on Pension Credits. You can read more about Pension Credit perks.

Your can’t defer if you receive certain benefits

If you or your partner receive any of the below State benefits then you won't get the extra 5.8% a year by deferring your state pension. This means the payments you do receive will not increase and you will miss out on valuable income in the meantime.

  • Pension Credit

  • Universal Credit

  • Income Support

  • Employment and Support Allowance

  • Jobseeker’s Allowance

Furthermore, you won’t be able to achieve a higher State Pension by deferring if you receive any of the below:

  • Carer’s Allowance

  • Incapacity Benefit

  • Severe Disablement Allowance

  • Widow’s Pension

  • Widowed Parent’s Allowance

  • Unemployability Supplement

You can contact your local Jobcentre Plus if you need help understanding how your benefits might be impacted by deferring your state pension.

What do the experts say about deferring the State Pension?

Whether a deferral will see you get more money over your whole retirement than if you claim for it at State Pension age depends on how long you go on to live for. With a lack of a crystal ball to predict that information, it might help to read what some experts say about deferring.

What does Sir Steve Webb say about deferring?

Sir Steve Webb, former Pensions Minister, explains that the deferral system is intended to ensure we receive roughly the same amount of money over our retirement whether we choose to defer or not. In one article that he wrote on the subject, he said:

“Broadly speaking, deferral is designed to be a 'fair deal' from which the Government doesn't gain or lose overall; but some people will tend to gain if they defer and others will tend to lose.

“If you are in good health and are likely to have a long retirement, you will probably benefit because your enhanced pension lasts for a long time. Conversely, if you are in poor health, then you may not get back the money you missed by deferring.”

What do Money Saving Expert say about deferring the State Pension?

Clare Casalis at Money Saving Expert also talks about deferring the State Pension. She says: “The best reason to defer is if you'll pay less tax later on.” 

She explains that the “real boon” of deferring your State Pension income is to avoid slipping into a higher tax bracket while you’re still earning an income. Instead, you can defer until you drop a tax bracket when you actually retire.

According to Clare, if a person doesn’t currently need the extra income from their State Pension and you know you'll drop a tax bracket when you do retire, it's definitely worth thinking about deferring.

How do I defer my State Pension or halt my payments?

If you are turning 66 soon and do not wish to receive your State Pension right away then you don't usually have to do anything. Put simply, if you don't put the claim in for it then they automatically presume you are choosing to defer.

When you do decide to start receiving your State Pension income then you can apply to the Pension Service online or submit a BR1 claim form.

However, if you are already receiving certain benefits then you’ll need to tell the Pension Service that you want to defer taking your State Pension. 

If you already receive the State Pension then you can stop taking it for however long you wish, but you can only choose to do this once. You can stop your payments by contacting the Pension Service online or by calling 0800 731 0469, lines open Monday to Friday, 8am to 6pm.

 

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