Your State Pension is likely to form the bedrock of your retirement. While it may not be sufficient to maintain the lifestyle you want, it provides a regular, guaranteed, inflation-proofed income that will last you for the rest of your life.
But did you know that you could increase the amount of State Pension you receive if you decide not to take it straight away?
If you didn’t know this, you’re not alone. Research published in FT Adviser has revealed that a quarter (25%) of over-65s are unaware they could receive a higher weekly amount – or even a lump sum – by deferring the date they started to receive the State Pension.
Read on to find out how much extra you could receive by deferring your State Pension, and the pros and cons of doing so.
If you defer your State Pension, you’ll receive a higher amount
When you reach State Pension Age (currently 66, rising to 67 between 2026 and 2028) it’s worth remembering that you won’t receive your State Pension automatically.
You should receive a letter a couple of months before you reach State Pension Age, explaining what you have to do to claim your pension. You can either claim your State Pension or delay (defer) claiming it.
If you decide you want to defer, you don’t have to do anything. Your State Pension will automatically be deferred until you claim it.
If you do decide to defer, you’ll receive a higher weekly amount when you do come to claim. This amount depends on whether you retired before or after 6 April 2016.
You reached State Pension Age after 6 April 2016
If you defer your State Pension, you will receive 1% more income for every nine weeks you defer. This equates to around an additional 5.8% for every year deferred.
If you’re on the full State Pension of £179.60 a week, and you defer for 52 weeks, you’ll receive an extra £10.42 a week – around £540 a year.
This assumes there is no annual increase in the State Pension. If there is an annual increase, the amount you could get could be larger.
You reached State Pension Age before after 6 April 2016
If you reached State Pension Age before 6 April 2016 you can still opt to defer. You will receive an additional 1% more State Pension income for every five weeks you defer, equivalent to around 10.4% a year. You can take this either as extra income or a lump sum.
If you receive £137.60 a week (the full basic State Pension) and you defer for 52 weeks, you’ll receive an additional £14.31 a week.
Again, this assumes there is no annual increase in the State Pension. If there is such an increase, the amount you could get could be greater than this.
Number of people deferring State Pension falls to its lowest level on record
Deferring your State Pension could provide you with a higher income. Despite this, new figures from the Department for Work and Pensions (DWP) show that the number of people receiving an increased State Pension after deferring the benefit has fallen to its lowest level since records began in 1999.
In September 2020 just 959,000 people – 7.7% of all State Pensioners – were receiving an increased weekly amount after deferring. That is down from a peak of 11% in 2004 when 1.25 million pensioners received extra income.
Deferring your State Pension – pros and cons
While deferring your State Pension and taking an increased income might seem like an excellent benefit, there are some pros and cons to consider before you decide to defer.
In some circumstances it could be appropriate to forego some income in the short term if it meant you would benefit from a higher, inflation-proofed income in the future. This could be particularly true if you’re in good health and have a long life expectancy.
Figures from This is Money show that, if you live until the age of 90, you could receive an additional £7,000 in retirement income by deferring the State Pension for a year.
If you live until you are 100, you could end up being £18,000 better off over your retirement by deferring your State Pension for 12 months.
If you’re still working when you reach State Pension Age, deferring your payments could also be beneficial. If your State Pension is added to your salary, it could push you into a higher tax band. You may then end up losing 40% of your pension income to higher-rate tax.
If you defer your payments until you finish work, your total income may then fall within the basic-rate tax bracket.
While some people will benefit from deferring their payments, this will not be the right decision for everyone.
You should consider health, life expectancy, and income factors when thinking about such a decision.
For example, if you have underlying health conditions then taking the State Pension immediately might benefit you. And, if you need the income as soon as possible to maintain your lifestyle, “a bird in the hand” might be preferable.
Get in touch
If you’re approaching State Pension Age and you want to know whether deferring your State Pension is the right decision for you, we can help.
We can also look at all your pensions and investments and create a tax-efficient strategy for drawing income that lets you live the lifestyle you want without worrying about running out of money.
To find out more, please get in touch. Email firstname.lastname@example.org or call us on 01454 416 653.