When you get to State Pension age it’s not usually a good idea to defer your State Pension.
Even though your State Pension does increase in deferment, it is likely to take many years for you to recoup the pension you defer.
In some cases, you may be well in to your 90s before you are cumulatively better off by deferring your State Pension.
What happens when you defer your State Pension
If you decide not to take your State Pension at State Pension age then the amount of Pension you are due when you do eventually take it will increase. This is providing you defer it for at least nine weeks.
Your State Pension increases by around 1% for every nine weeks you defer. This means you can increase your annual pension by around 5.8% if you defer for a whole year.
As an example, if you were to defer the current State Pension (£203.85 at the time of writing) for a year, your payment would increase to £215.67 per week. An extra £550 per year.
You can defer claiming your State Pension for as long as you like. Be sure not to end up in prison though. You don’t get any increases whilst locked up as your benefits are basically frozen!
Why might you want to defer receiving the State Pension? Well, some people do it because they don’t need the money at that point in their life. They might still be working and paying a higher rate of Income Tax. They therefore believe that the extra income from State Pension will be taxed too much.
Or it could be that some people just want a higher level of State Pension income and are prepared to defer to get it.
Why it doesn’t add up to defer your State Pension
If you were to defer your State Pension for just one whole year then remember, you have given up one year of income. At the current full State Pension rate this would be around £9,471.
So, although you would receive a higher State Pension income when you decide to take your pension, you need to factor in when the extra income each year adds up to the year you have given up.
As an example, if a 66-year-old was to defer their State Pension for one year and the State Pension was to increase by inflation at 3% per year then it would take approximately until age 91 until you were better off.
Even with the increase in deferment, it still takes around 25 years to recoup the year you have given up.
But what about if you were to pay tax on taking the State Pension at normal State Pension age?
Well for a basic rate taxpayer (20%) using the same scenario above it takes 21 years to recoup the pension given up assuming you don’t pay any tax on your State Pension when you do eventually take it.
For a higher rate taxpayer (40%) it takes 17 years.
So already a compelling case not to defer your State Pension unless you believe you are going to live way past normal life expectancy.
There is, however, a tactic you could use to get the best of both worlds. As in receiving your State Pension at State Pension age but not pay any tax on it if you are still working.
The way to do this is to contribute your State Pension into a personal or workplace pension. You could do this even if you were only planning to work one more year and therefore were originally deciding whether to defer your State Pension.
Taking your State Pension at normal pension age and investing it into a personal or workplace pension means you effectively get all the tax back you would have paid on receiving the pension. Even if you decided to make an immediate withdrawal from the personal or workplace pension the following year and paid tax on part of the withdrawal you would still have around £17,805 in collective payments over the two years. This compares to just £10,020 were you to defer your State Pension a year.
You can contribute up to 100% of gross earnings into a personal or workplace pension or the available Annual Allowance whichever is lower. Even if you do not have enough allowance available you may have scope to gift money to your partner’s pension or even a child’s pension.
Quite frankly you are likely to spend less as you get older so the more money you receive now the more you can do in the early part of your retirement. The time when you will hopefully be your healthiest and fittest.
If you are not sure what to do with your personal and workplace pensions at retirement then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy retirements over the years. This could be you too.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.