Deferring the State Pension

The State Pension has changed significantly over the years, but is still the most important source of retirement income for many people.

The State Pension age has increased in the last few years and many people of working age today won’t start to receive it until age 68 (or even later if the rules change again). But working culture and lifestyles have also changed – people are living longer and working longer, although with more flexibility over employment and working hours.

This means you might need additional flexibility around your retirement income. The decision to take your State Pension or defer it could be an important factor in your decision.

The State Pension Explained

In summary, the State Pension works as follows:

• The State Pension currently comes into payment at age 66, although as explained above, this is increasing to at least age 68 to account for rising life expectancies.
• The current full State Pension is £203.85 per week. Some people may receive more than this if they built up additional entitlement under an older scheme.
• Your State Pension forms part of your taxable income, although it is not taxed directly.
• Your State Pension increases annually. The scheme currently benefits from the triple-lock, which means income will increase by the higher of inflation, earnings, and 2.5%.
• You need 35 years’ worth of National Insurance credits to receive a full State Pension. If you have a partial record, you will receive a proportionate amount.
• You can build up your record by working, receiving certain benefits, or making voluntary contributions.
• You can still receive your State Pension if you move abroad, although in some countries, it might not increase. It’s a good idea to check this if you are thinking about emigrating.
• Your State Pension is not paid automatically. You will receive a letter at least two months before you reach State Pension age prompting you to claim your pension.
• Any missed years can be made up via voluntary contributions.

How Deferring Your State Pension Works

Deferring your State Pension is simple – you just do nothing. If you don’t make a claim, you won’t receive anything.

You will simply need to contact the Department of Work and Pensions when you are ready to claim.

If you defer your State Pension for at least 9 weeks, you will receive an additional 1% for every 9 weeks of deferral. This works out as around 5.8% for every year, or £11.82 per week based on current rates.

Since 2016, it is no longer possible to take the deferred payment as a lump sum.

Should You Defer Your State Pension?

If you are still working, you may not need the extra money from your State Pension. Additionally, the idea of paying your highest rate of tax on your payments might not be appealing. Depending on your tax rate, the net weekly income could be as follows:

• Basic rate – £163.08
• Higher rate – £122.31
• Additional rate – £112.11

Here is an example of potential state pension benefits based on years of services:

But what if you used the income to make private pension contributions? Not only would this potentially wipe out the additional tax liability, but you would also be boosting your retirement pot for when you eventually need it. You may be able to do this through your employer, in which case the administration is likely to be minimal. Alternatively, you can set up a personal pension.

If your main source of income is investments (including company dividends) and pensions rather than employment, you may be limited to pension contributions of £3,600 per year (gross). In this case, there could be options to restructure your income and capital to factor in your State Pension, without significantly increasing your tax bill. This will depend on your situation, and advice is recommended.

Taxation aside, it is also worth considering what you would do with the money if you claimed your pension at the normal date rather than deferring it. Even if you put the surplus in a high interest savings account, you could potentially receive interest of 5% – 6% based on current rates, You may receive higher returns over the long-term if you invest the money.

This is as well as having received the income in the first place. Compare this with the deferral payment of 5.8%, which is intended to cover missed payments. You would effectively be recouping £10,600 of deferred income at a rate of £11.82 per week – ignoring any increases and lost interest, it would take around 17.5 years (in line with a typical life expectancy) to break even.

Remember, you can’t normally pass on your State Pension, whether you have started claiming it or not. There are some exceptions for additional State Pension accrued before 2016, in which case, it may be possible to pass some of your payment to a spouse on death. Claiming your pension and building up a nest egg can mean a little extra to pass on to your spouse or family.

In most cases, the most effective option is to claim your State Pension as soon as possible, providing you are willing to do some simple tax and investment planning.

Please don’t hesitate to contact a member of the team if you would like to discuss your retirement plans.

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The Financial Conduct Authority does not regulate Tax planning.

The content in this article was correct on 24/11/2023.

You should not rely on this article to make important financial decisions. Teachers Financial Planning offers independent financial advice on savings, pensions, investments, protection and mortgages for teachers and non-teachers.

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