Deferring your pension benefits could deliver a massive boost to your income in retirement.
Did you know by putting off taking your state pension for five years, you could enjoy an increase to your weekly income of more than 50%? Defer your pension for longer and you could get even more.
When you reach State Pension age* you may decide you don't yet need the weekly income the state pension provides. Perhaps you want to continue working, or you have enough income from other sources.
Two Choices
If deferring your state pension makes sense, you have two choices: receive a higher weekly state pension at a later date or take an extra lump sum payment now. If you go for the lump sum option, you'll receive the state pension at the normal rate when you eventually start taking it.
Even if you have already started claiming, you can choose to stop receiving benefits for a time to build up an extra income or lump sum.
To receive extra weekly state pension, you must defer for at least five weeks. However, if you want to receive a lump sum payment, you must put it off for a minimum of a year.
The amount of extra income you could get is 0.2% of your weekly state pension for each week you have deferred your claim. This works out at 1% extra for every five weeks, and roughly 10.4% for a full year. (That's 52% if you defer for five years.)
The extra lump sum is based on the amount of state pension you would have received plus interest. The interest rate is always 2% above the base rate. The base rate is currently 0.5%, so any lump sums accruing now earn interest at a rate of 2.5%. This will alter as the base rate moves up and down.
Here's an example of how much better off you could be by deferring, if you had built up an entitlement of say, £90 per week at normal retirement age:
Benefits of deferring your state pension
|
Weekly state pension |
Number of years Deferred |
Amount of state pension given up |
Extra lump sum before tax |
Extra weekly state pension before tax |
|---|---|---|---|---|
|
£90 |
1 year 2 years 3 years 4 years 5 years |
£4,680 £9,360 £14,040 £18,720 £23,400 |
£4,740 £9,600 £14,580 £19,680 £24,910 |
£9.36 £18.72 £28.08 £37.44 £46.80 |
Let's take a look at the difference in your total state pension income if you claimed it at 65 years, compared with putting it off until you reach 70.
I'll assume in these examples that you live until you're 85. The annual inflation-linked increases in your state pension income have been ignored.
This tip is absolutely vital to know if you want to make the most of your pension pot at retirement.
If you were entitled to a weekly state pension of £90 which you start taking at the age of 65, by the time you reach 85, you would have received payments totalling £93,600 (before tax).
But, if you defer until you're 70, you'll receive an enhanced State Pension of £136.80 per week. After paying that level of income to you for the next 15 years, you will have received a total of £106,704 (before tax). That's over £13,000 more than you would get if you had started taking benefits from 65 at the normal rate.
The benefits of deferring are far less pronounced if you choose to take a lump sum. So using the same example, if you compare the total amount you would have received by taking your State Pension at 65 (£23,400, before tax) with the lump sum you could get by putting it off for five years (£24,910, before tax), you'll find you're just £1,510 better off.
Remember, if you delay your state pension for longer you could build up an even larger lump sum or weekly income.
What else do you need to know?
Tax - Any extra weekly income or lump sum is treated as income for tax purposes. The extra weekly income is taxed in the same way as the normal State Pension.
The lump sum is taxed at the highest tax rate that applies to your other sources of income, so it can't push you into a higher tax bracket. That means, if your other income makes you a basic rate taxpayer, your lump sum will only be taxed at 20% and no more.
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Other benefits - Any extra weekly income you receive will be taken into consideration when calculating your eligibility to means-tested benefits such as housing benefit, council tax benefit, pension credit and tax credits. However, any extra lump sum payment will be disregarded in realtion to claims for housing benefit, council tax benefi and pension credit, but will affect eligibility for tax credits including child tax credit and working tax credit..
When deferring won't earn you extra state pension - Any period when you're receiving any of the following benefits won't count towards earning extra state pension:
Carer's allowance, incapacity benefit, severe disablement allowance, unemployability supplement, widow's pension, widow's mother's allowance, or any type of state pension (except graduated retirement benefit or shared additional pension).
There's no doubt deferring your state pension should enable you to enjoy an enhanced income in retirement. All you need to do is work out whether you can afford to put it off.
*State Pension age is currently set at 65 for men and 60 for women. For women born after 5 April 1950 but before 6 April 1955, State Pension age is rising from 60 to 65 between 2010 and 2020. Women born on or after 6 April 1955 but before 6 April 1959 will reach normal retirement age at 65. State Pension age will increase for both men and women from 65 to 68 between 2024 and 2046 under Labour legislation, although the coalition government is likely to bring these changes in sooner.