The state pension is money from the government that provides you with an income after you reach eligibility age, at present 66. The maximum is currently £10,600 per year, but the amount you’d get depends on your National Insurance (NI) contributions and whether you pension was ‘contracted out’ at some point. Here’s why some people defer their state pension until the time is right.
Can I defer the state pension – and what happens if I do?
Not everyone realises you don't have to receive your state pension as soon as you're entitled. In fact, if you don't take action to claim your state pension, it'll be automatically deferred. By not claiming your state pension right away you're forgoing income in the short term, but to compensate you'll get a larger amount when you do choose to.
If you are in good health and have enough other income to support your lifestyle then deferring the state pension can sometimes make sense. In particular, if you are still working beyond retirement age, or you know you'll experience a drop in income within a few years, it can be worthwhile. However, you must also be confident you will live a relatively long life. The longer you live the more valuable deferring gets, but if you live for significantly shorter than average it is unlikely to be worth it.
How much extra money do you get for deferring?
Deferring the state pension means forgoing income in the short term but a higher level when you start to collect it. The enhancement is just under 5.8% for each year deferred, which works out at around £614 a year presently.
Very broadly, you'd need to live at least 17 years after taking your state pension to be better off deferring – for the uplift in the amount to make up for the years of income given up. This is similar to the time an average 66 year old is expected to live. However, the ‘breakeven point’ can occur at a lower age once you take tax into account.
It is important to note that if you or your partner is in receipt of certain benefits such as pension credit or income support you should not defer the State Pension. There is no advantage in doing so and it could even mean a reduction in payments. There is more information about this on the Gov.uk website here.
How is the state pension taxed?
State pensions count as taxable income, so an individual’s current and future tax position might tip the balance in favour of deferring. In particular, it is important for those still in work past state pension age to consider whether taking it as soon as possible is the best idea. By deferring until you stop working there can be quite a significant saving, especially if you drop from a higher to a basic rate taxpayer, say, or from a basic rate taxpayer to a non-taxpayer, and it means the amount you are giving up in the short term is less.
Presently, the annual amount of the State Pension after tax is worth the following:
- Non-taxpayer: £10,600 (full amount)
- Basic-rate taxpayer: £8,480
- Higher-rate taxpayer: £6,360
- Additional rate taxpayer: £5,830
Please note income tax rates differ in Scotland, but the same principle applies.
If you are paying tax on your state pension you are effectively giving up less income than the full amount in exchange for an uplift later on. If that uplift, and the base level, is at least partly going to be taxed at a lower rate then you benefit a bit more from deferring.
Although this mostly applies to those still working beyond age 66, those with income from other sources such as property that is likely to stop or fall at some point could also defer and save tax. If you don't need the extra income now, and you know you'll drop a tax bracket within a few years, it's therefore worth considering deferring your state pension, and starting to claim it once you're at that lower threshold.
How long can I defer the state pension for?
If you have sufficient longevity the tax saving combined with the uplift described above can outweigh the short term income forgone from deferring. However, if you are unfortunate enough to die early in retirement it won’t. That’s why it can be a good option for some and much less desirable for others, for instance those in poor health.
In theory, you can keep deferring the state pension for as long as you want, but it is generally unwise to do so beyond a few years as you are increasingly less likely to recoup the money given up during the years of deferral.
Charles Stanley is not a tax adviser. Information contained in this article is based on our understanding of current HMRC legislation. Tax reliefs are those currently applying and the levels and bases of taxation can change. Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future. If you are in any doubt, you should seek professional tax advice.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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