Should you defer your state pension and stay in work?

Tens of thousands of people have delayed taking their state pension to boost their payments – but would deferring work for you?

Nearly 42,000 (41,938) claimed a deferred state pension in 2023/24, according to figures obtained by retirement firm Royal London via a Freedom of Information (FOI) request.

Of this figure, 10,656 individuals postponed taking their state pension for five years or more, including 4,435 who delayed by at least 10 years.

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The average period of time people deferred for was four years.

The number of people claiming a deferred state pension in 2023/24 was 22% less than the 54,037 deferrers who claimed in the previous year.

Sarah Pennells, consumer finance expert at Royal London, said with the state pension amount rising, dragging more into paying income tax, we could see the number of people deferring the payment rising.

“The numbers deferring in 2023/24 have fallen quite dramatically from the previous year, which could be because fewer pensioners are able to manage without the state pension,” Pennells said.

“However, with the new state pension expected to rise to just below the personal allowance from April, we could see an increase in the numbers of people with other forms of income deferring, as they look to reduce the income tax they pay.”

Can you defer a state pension?

If you are approaching state pension age (currently 66, rising to 67 by 2027 and 68 by 2046 – although these timelines could change subject to a recently-launched State Pension Age Review) and think you can manage without the state pension for a while, choosing to defer the state pension could be a good idea.

Deferring when you claim your state pension will boost how much you get each week when you do come to take it.

We look at how deferring your state pension works, how much extra money you'll get, whether it's worth doing – and also whether you should delay receiving income from personal and workplace pensions.

Deferring the basic state pension

Those who reached state pension age before 6 April 2016 – who would receive the basic state pension – are under the old rules, where deferral was particularly attractive.

You had a choice between an extra 10.4% of your pension for each year of your deferral or a lump sum plus interest for pension foregone.

A small number of people are still deferred from pre-2016. When you claim your deferred basic state pension, you’ll get a letter asking how you want to take your extra pension. You’ll have three months from receiving that letter to decide.

If you opt for higher weekly payments, your state pension will increase every week you defer, as long as you defer for at least five weeks.

The extra amount is paid with your regular state pension payment.

For example, say you get £176.45 a week (the full basic state pension). By deferring for 52 weeks, you’ll get an extra £18.35 a week (10.4% of £176.45). This works out as £954.20 over a year.

Or you can get a one-off lump sum payment if you defer claiming your state pension for at least 12 months in a row. This will include interest of 2% above the Bank of England base rate.

You’ll be taxed at your highest income tax rate on your lump sum payment. So, if you’re a basic-rate taxpayer, your lump sum will be taxed at 20%. It would be 40% for higher rate taxpayers and 45% for those on the additional rate.

Steve Webb, partner at pension consultancy LCP, says for this group, “it is worth being aware that your lump sum is taxed at the marginal rate in the year that you draw it”, if that’s the route they choose.

Also, he adds, as you get older, deferral gets less attractive.

“This is because the reward for deferral stays the same each year (another 10.4% on the base figure) but the number of years you have left to recover the money you went without declines,” he says.

Deferring the new state pension

If you’re reaching state pension age on or after 6 April 2016, you’ll get the new state pension, and the deferral terms are less generous.

Deferring the new state pension will increase every week you defer, as long as you defer for at least nine weeks.

The payout increases by the equivalent of 1% for every nine weeks you defer. This works out as just under 5.8% for every 52 weeks.

The extra amount is paid with your regular state pension income – there is no option to claim a lump sum plus interest, as there is with the basic state pension.

For example, say you get £230.25 a week (the full new state pension). By deferring for 52 weeks, you’ll get an extra £13.35 a week (5.8% of £230.25). This works out as £694.20 over a year.

How to defer the state pension

You don’t receive the state pension automatically. About two months before you reach state pension age, you‘ll receive a letter from the government saying you’ll soon be eligible to claim.

To defer your state pension, you just don’t claim. The longer you leave it, the bigger the increase you could get.

If you’re already in receipt of the state pension, you can still defer it – but only once. To request a pause to your state pension, contact the Pension Service.

Is deferring the state pension worth it?

You need to weigh up the extra money you will receive by deferring, versus the money given up today. Basically, you will need to work out how long it will take to make that money back to ensure you really get your money’s worth from deferring.

According to Royal London, a basic-rate taxpayer delaying taking their state pension for one year from the age of 66 would need to live until around 82 to see the benefit. A higher rate taxpayer of the same age would need to live until 79 to recoup the costs.

There are other considerations to factor in – for example, if you’re not in good health, you may not reap the full benefit of deferring.

You cannot build up any extra pension if you or your partner are receiving certain benefits, such as Pension Credit or Carer’s Allowance.

Helen Morrissey, head of retirement analysis at investment platform Hargreaves Lansdown, points out that retirees should consider the tax implications of deferring.

She says: “Receiving the (pension) money a bit later will boost your income and it could lead to you paying more tax, or pushing you over a threshold into paying a higher rate.

“It could also push your income above a threshold meaning you don’t get a benefit that you otherwise would be entitled to.”

Can you defer a private pension?

It’s possible to defer a private pension but the rules will vary depending on the type of pension it is, as well as the particular scheme.

For defined benefit schemes, some​ may allow you to take your pension later and pay a higher pension but this will vary from scheme to scheme so you’ll need to check the specifics of yours.

If you are in a defined contribution (DC) scheme, then you can usually access your pension from the age of 55 (rising to 57 in 2028) – but can defer taking it if you want to continue working, for instance.

Morrissey explains: “You can continue to contribute to your pension and receive tax relief on contributions (up to your annual allowance) until the age of 75.”

Is deferring a private pension worth it?

Leaving a DC pension pot invested gives it the opportunity to grow further, though markets can fall during this period too.

“It’s worth checking that you aren’t potentially missing out on benefits such as guaranteed annuity rates which may depend on you taking an income within a certain time window,” Morrissey says.

If no such benefit exists for your DC scheme though, Webb points out, the longer you leave it before you take your pension, the better the annuity rate you could secure, because you would be older when you take it out.

Remember the money purchase annual allowance (MPAA)

One possibility is a hybrid approach. If your earnings from employment need supplementing, you could claim your state pension, but not begin drawing from private pension savings – or vice versa.

But watch out for a trap here. If you begin taking an income from your private pension savings – even a very small one – you are likely to come up against the money purchase annual allowance (MPAA). This limits you to making further pension contributions of just £10,000 a year.

The MPAA was introduced to stop people drawing pension benefits and then immediately reinvesting them to get a second chunk of tax relief. If you’re still paying into a pension through an employer while taking income from another of your private pensions, this rule can catch you out.