Deferring my State Pension
Deferring your State Pension means choosing not to take your pension for a few months or years even though you qualify for it, in return for higher payments later in retirement.
If you're getting ready to receive the State Pension or have already reached pensionable age, you may be contemplating whether or not you should defer your State Pension. Making the right decision depends on your particular circumstances, yet deferring can nevertheless bring substantial benefits, especially given the overall backdrop of rising life expectancy and extended years spent working.
What is there to gain?
The single biggest benefit of deferring your State Pension is that you'll receive larger payments when you eventually claim – also known as extra State Pension. If you reached pensionable age before April 6th 2016, the payments will increase by 10.4% every year deferral takes place (1% every five weeks), while those receiving the New State Pension can enjoy an increase of 5.8% with each year deferred (1% every nine weeks).
If you're in the pre-April 2016 cohort, you can also choose to receive all of your deferred payments in one lump sum instead (plus interest of 2% above the Bank of England's base rate), although this option is only open to those who have decided not to claim for at least 12 months in a row.
In some cases, you can also inherit a portion of your partner's Additional State Pension, however, you will have to contact the Pension Service to find out if you are eligible. If you are, the amount you'll receive will be worked out when you claim State Pension, and will be paid on top of the regular amount.
Which should you choose?
There are merits to both extra State Pension options, and the choice between the two depends primarily on your health. If you opt for higher weekly payments and live for a long time, you will likely earn more than you would if you'd have taken the lump sum, although how long this would take depends on the interest rates the lump sum is subject to.
It's also important to bear tax in mind – if you're in a higher income tax band when you take the lump sum, you'd lose more money than drip-feeding yourself the money, especially if you stay within the bounds of your personal tax allowance. Click here to find out more about tax in retirement.
Are there any drawbacks?
Extra State Pension is not applicable to any days when you receive the following:
- Universal Credit (or if your partner receives this)
- Pension Credit (or if your partner receives this)
- Income Support (or if your partner receives this)
- Incapacity Benefit
- Severe Disablement Allowance
- Income-related Employment and Support Allowance
- Income-based Jobseeker's Allowance
- Carer's Allowance
- Widow's Pension
- Employability Supplement
- Widowed Mother's Allowance
- Time spent in prison (payments resume when you're released)
Both forms of extra State Pension can affect your tax credits, and the higher weekly payment option will reduce your Pension Credit, Council Tax Reductions and Housing Benefit.
Deferring your State Pension can bring a lot of benefits, and makes sense if you end up working beyond pensionable age, but be sure to seek financial advice before you make a decision to ensure you receive the greatest gains possible.
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