Should I defer my State Pension?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
You do not have to start taking your State Pension as soon as you reach State Pension age (i.e. age 66 in 2022). Instead, you can choose to defer it – potentially allowing you to claim a higher income later. Yet how does deferring your State Pension work, and is it worth it?
Below, our financial planners at Castlegate in Grantham offer some thoughts on this important subject. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
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State Pension deferral: an overview
If you reach age 66 after 6 April 2016, then you can start claiming your new State Pension. In 2022-23, the standard maximum for full new State Pension is £185.15 per week (£9,627.80 per year). However, you may be able to raise this amount by 1% for every 9 weeks that your State Pension is deferred. Delaying taking it for a full year, for instance, would increase it by 5.8%. If you reached State Pension age before 6 April 2016, however, then you could boost your State Pension income by 1% for every 5 weeks of deferral (10.4% for the year).
The longer you put off claiming your State Pension, therefore, the more you will get. You can defer your State Pension for as long as you desire – even if you have started drawing from it. However, you must defer everything (e.g. basic state pension plus any additional state pension) if you do this. You must also defer for a minimum of 5 weeks to claim any boost to your State Pension income. If you defer for at least a year, then you can take your State Pension as a lump sum payment (assuming you did not qualify for the State Pension before 6 April 2016).
Should I defer my State Pension?
Naturally, if you can afford to defer your State Pension, then it might be a good idea (depending on your circumstances and goals). However, there are risks to doing so. If you are in bad health, for instance, then you may not live long enough to recoup the difference between taking State Pension income later, instead of earlier. Bear in mind that if you reach State Pension age after 6 April 2016, then you are potentially giving up over £9,600 per year. This means that it would take 17 years to start getting your money back. However, for those who reached State Pension age before this date, the “payback period” is closer to 10 years.
If you have retired abroad to a country which does not let you receive the annual State Pension increases (e.g. south east Asia – where the cost of living is typically low), then deferring can be an attractive option. For those able to live off other income sources in the meantime, such as a private pension and/or workplace pension, then your deferred State Pension can be effectively thought of as a very effective investment account.
Some considerations regarding State Pension deferral
If you are looking to increase your income from your State Pension, then deferral may not be your only option. Another idea is to consider making voluntary National Insurance contributions (NICs) to build up a “complete” record. You need 35 “qualifying years” of NICs to get the full new State Pension in 2022-23, and it costs up to £824.20 for Class 3 contributions to fill in a “gap” (missing year) on a record. Whilst this may sound like a lot, each qualifying year currently works out to be £275.08 a year in State Pension. So, if you did pay £824.20 to gain another qualifying year, you would get the money back in about 4 years.
Bear in mind that deferring a State Pension may be more or less appropriate partly depending on whether you intend to keep working, or not. At present, about 8% of state pensioners (1.5m people) work beyond State Pension age. It is not known how many people simply defer their State Pension to get a bigger income later. You can claim your State Pension whilst working, but this could push an individual’s total income into the Higher Rate (40% tax) if care is not taken. Depending on how high your non-pension earnings (e.g. salary) are, it may be worth deferring your State Pension to save on tax in the short term and achieve a higher retirement income later.
The other consideration for those thinking about State Pension deferral is whether to take extra income or a lump sum. This partly depends on what you want to spend the money on and when you achieve State Pension age. A lump sum is taxable as income but will not lead a Basic Rate taxpayer to pay the Higher Rate (even if their total income is pushed into this bracket). Broadly, those who reached State Pension age before 6 April 2016 are likely to do better by taking the extra income due to the 10.4% interest rate on offer.
Invitation
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01476 855 585
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