Deferring taking your state pension

Deferring the start of your state pension can be a good idea.

The state pension age (SPA) is currently 65 for men and a shade under 62 for women, but you do not have to draw benefits when you hit your SPA. There can be good reasons for not claiming your pension, for example you might still be working and might therefore not need the extra income.

At present there are two options available to you if you want to delay the start of payments under your state pension:

  • Extra Pension If you delay claiming your state pension for at least five weeks, under the current rules your pension will normally be increased by 0.2% for each week of deferral. For instance, if you start your state pension two years after your SPA, your entitlement will increase by 20.8% (0.2% x 52weeks x 2 years). This uplift will apply in addition to the normal annual increases to state pensions.
  • A 10.4% annual increase at a time of 0.5% base rates is definitely generous, even after allowing for the fact that your higher pension will be paid for a shorter period.
  • A Lump Sum This option is only available if you defer your pension for at least a year.  The deferred pension payments are paid as a single taxable lump sum, with interest, once you start drawing your pension. That pension will be at the same level as when you initially deferred it, plus the usual annual increases. 

The interest rate applied to the deferred payments is “at least 2% above Bank of England base rate”. At present this means 2.5% interest, which beats any available instant access account. 

The lump sum is not added to your income as you might expect, but instead is taxed at your highest rate of tax in the tax year you draw it.

Death benefits during deferral and the interaction of pension deferral with other social security benefits are both potential minefields. To make matters worse, the deferral rules themselves will change in April 2016, when the single-tier State Pension begins. The fine detail of these revisions is awaited, but we know the lump sum option will disappear and the deferral rate will probably fall.  Given these complexities, it is important to seek advice before making the decision to defer.