Think before deferring your state pension

Delaying your state pension won’t be the right move for everyone, says David Prosser.


Snoozing your pension may not be a good idea
(Image credit: OcusFocus)

Although new rules have made deferring your state pension significantly less attractive, it remains a popular option. However, the people who choose to put off receiving their payments could be making an expensive mistake.

Each year around 330,000 Britons reach state pension age which will equalise at 65 for men and women next month and are entitled to begin drawing the weekly benefit. However, people also have the option of deferring their pension, in which case they receive a larger sum when they do begin taking it. Around one in nine currently do so, according to data published by the Department for Work and Pensions last year.

For those reaching retirement age before April 2016, the upgrade was worth 1% extra pension for each five weeks of deferral or 10.4% for those deferring for a full year. Since then, however, the upgrade has been reduced to the equivalent of 5.8% for a full year of deferral. Moreover, the additional pension is subject to different rules on increaseseach year it is not protected by the "triple-lock" guarantee that normally applies to the state pension.

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So anyone considering deferral must make a calculation. Will they live long enough to recoup the pension foregone while they were deferring? Under the old rules, the break-even period was around nine years, but thishas increased to 17 under the new system.

In other words, a man retiring at age 65 but not taking his pension until age 66 would have to live until age 83 to make a profit on the deal. Given that the typical man turning age 65 in Britain today can expect to live until they are 83-and-a-half, there will be many people who fall short. Life-expectancy rates for women are slightly higher the average 65-year-old can expect to live until age 86 but many will still lose out.

The decision about whether to defer therefore needs careful consideration. Anyone who needs the income on offer should take it as soon as it becomes available and only older people in good health should normally consider deferring. One complication for some is that deferring may enable you to pay a lower rate of tax. If taking the state pension will push you into a higher income-tax bracket, particularly if you're still receiving income from employment, deferral could make more sense.

Get a bank account, pensioners urged

Some 900,000 pensioners who receive their state pensions through a Post Office card account have received letters urging them to switch to getting the money through a bank account. The government has promised to maintain Post Office accounts until at least 2021, but it is desperate to shift pensioners off the system as soon as possible to save money.

However, while the Post Office's accounts offer very limited functions there are no online facilities and few payment options they are popular with pensioners, who can simply withdraw their pension through a cash machine.

Critics, including the former pensions minister Ros Altmann, have accused the government of giving the impression that switching to a bank account is now mandatory, because the letters sent to pensioners do not explicitly explain that they don't have to transfer. But ministers say the Post Office card account was only set up to cater for pensioners who are unable to open bank accounts, and that since the account was launched in 2003 far fewer older people are struggling to access traditional banking products.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.