Should you defer your State Pension? Here’s what you need to know

According to the Independent, one in four retired adults are now considering a part-time job to help deal with the cost of living crisis. Furthermore, one in six have already returned to work.

When you consider that the Guardian revealed food prices soared by a record 10.6% in September, returning to work after retiring is understandable. That said, there are many people who continue to work beyond their State Pension Age (SPA) for the social or mental health benefits.

If you’re one of them and a client of HarperLees Financial Planning, you’ll probably know that you can defer your State Pension, and that doing so could have financial benefits. If, on the other hand, you know someone who is considering returning to work, read on to find out more about deferring the pension and why it may or may not be worth considering.

The State Pension is central to many people’s retirement

While it’s unlikely to provide enough income to maintain your retirement lifestyle, the State Pension provides a regular and guaranteed amount for the rest of your life. If you reached the age of 66 after April 2016 (or 67 as from 2028) you’re entitled to the “new” State Pension of £185.15 a week, or £9,627.80 a year (2022/23).

If you reached SPA before April 2016, you’ll receive the “old” State Pension, which is £141.85 a week, or £7,376.20 a year.

The State Pension depends on your National Insurance record

To receive the full State Pension you need to have 35 “qualifying years” on your National Insurance contributions (NICs) record. If you have less than this, you may have discussed with us how you can use credits to fill the gaps and boost the amount of pension you receive.

If you know somebody who would benefit from a conversation with us about this we would be happy to help. A common misconception is that the State Pension starts automatically, when in fact you will typically be contacted by the government two months before receiving it. At this point you can choose whether to take it or defer it.

Deferring your State Pension could be a shrewd strategy

If you’re earning and do not need the income provided by the State Pension, deferring it might be a shrewd move. Doing so could increase the amount you later receive and could help you sidestep a higher Income Tax liability.

As taking the State Pension while earning increases your total earnings, it will push your Income Tax liability up. Taking it later on when you’re receiving a reduced income from your retirement fund might be a more tax-efficient option.

You can defer your State Pension for as long as you want, although it has to be for a minimum of five weeks. If you’re already drawing it, you may still be able to defer it to earn extra money in the future.

If you do decide to defer you must postpone all of your State Pension, including any additional amount you gain via the State Second Pension or SERPs. The additional amount you receive when you do start taking your pension depends on whether you’re receiving the old basic State Pension or the new one, and is calculated as follows:

• Old State Pension: For every five weeks you delay your pension it’s increased by 1%, or 10.4% for every full year. By deferring for 52 weeks, you’ll receive an additional £14.75 a week or £767 a year
• New State Pension: You receive 1% for every nine weeks you defer, or 5.8% per annum. This is because the new pension provides a higher basic amount. By deferring for 52 weeks, you’ll receive an additional £10.74 a week or £558.48 a year.

If you receive the new pension, you can receive the deferred amount as a lump sum.

Consider potential losses against possible gains

If you want to delay your pension, it’s important to speak to a financial planner to consider the long-term potential gain against the immediate loss of not taking it. For example, if you are eligible for the new State Pension and decide not to take it for a year, you’ll lose £9,627.80 in pension.

If you then receive an additional £558.48 a year once you take it (a 5.8% increase) it could take around 17 years to cover the loss of the first year’s pension payment. Although, when you consider that the Office of National Statistics (ONS) reveals that the average life expectancy in the UK from the age of 65 is around 19 years for a man and 21 years for a woman.

This means deferring your pension may still make sense. This strategy dovetails into research by Royal London, which reveals that if a man defers his State Pension for a year and then lives for a further 18 years, he’ll receive a total of £183,311.96. This compares to £181,002.64 if he doesn’t defer and lives for 19 years.

If a woman takes her State Pension immediately and lives for 21 years, they’ll receive £200,258.24. If she defers the benefit for a year and lives for a further 20 years, she will receive £203,679.96. Please note, the pension provider did not include future indexation of the State Pension or increments for deferral.

The figures reveal that if you’re in good health, deferring your pension State Pension might be something you want to consider. If your health is not as good, you’ll need to consider carefully whether it’s right for you.

A specific consideration is the treatment of the State Pension in the event of death. Prior to 6 April 2016, it was possible for benefits to continue for a widow or widower. However, the ‘new’ State Pension launched on 6 April 2016 ordinarily ceases on death.

Furthermore, deferring your State Pension may affect any benefits you’re claiming, such as pension credit, house benefit and council-tax reduction. The extra amount you receive is counted as income.

Get in touch

As you can see, deciding on deferring your State Pension is complex. If you or someone you know would like to discuss whether it might be right for you, please contact us. We can be reached on info@harperlees.co.uk or by calling 01277 350560.

Please note

This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.