Not everyone turning 66 and becoming eligible to draw their state pension needs the money straight away. In which case, does it make sense to defer taking the cash in return for a more generous pension when you do start taking it? The answer for increasing numbers of people appears to be no: state-pension deferral rates have fallen to an all-time low.
In 2021/2022 the state pension, assuming you qualify for the full amount, is worth around £9,340 a year. However, if you are about to become eligible for this money, you are not obliged to claim it. For each year that you defer taking the money, you will receive 5.8% more income when you do start drawing it. So, for example, put off claiming this year’s £179.60 weekly state pension for 12 months and you would be entitled to claim £190.02 in 12 months’ time.
If you have other pension income to live off, that might be an attractive option. You are effectively treating your state pension as a savings account, and 5.8% a year is far more than you could earn right now by taking the money and depositing it in a bank or building-society account.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Despite this logic, data from the Department for Work and Pensions (DWP) suggests that just 7.7% of all state pensioners are currently receiving a higher income because they deferred drawing it – down from 11% in 2004.
A less generous system
One explanation for the fall may simply be a lack of awareness. The DWP does not make much effort to publicise your right to defer.
But a big part of the story is that the system has become less generous. Anyone reaching state-pension age before April 2016 was entitled to a 10.4% uplift in their entitlement for each year of deferral.
The effect of the change has been to extend substantially the breakeven point for those who defer – the time it takes to earn back, through your higher income, the pension you missed out on when deferring.
Under the old system, someone deferring for a year would break even approximately nine years after taking their money. Under the new system, it takes 17 years to reach the same point.
That changes the decision-making process considerably. Official statistics suggest that a 66-year-old man today can expect to live, on average, until the age of 83; a 66-year-old woman can expect to reach 86. Substantial numbers of people will therefore not be around long enough to benefit from deferring their pension.
So where does that leave you? Well, if you are in good health, deferring your pension is still worth considering. The case for doing so will be even stronger if you will have moved down a tax rate by the time you start claiming.
If you are still working, say, you may be paying higher-rate tax on your income at 40%, so this is what you would lose on your state pension too.
If you defer taking your pension until you have become a basic-rate taxpayer, you will halve the tax deduction on it – and thus shorten your breakeven period from deferral.
Some expats will benefit
Another group that should consider deferral is expatriate pensioners living in countries where UK state-pension benefits are not increased each year in line with what pensioners in the UK receive.
If you spend your retirement in certain countries – Australia, Canada and New Zealand, for example – your UK pension benefits will be fixed at the time you start drawing them. So, if you can afford to do so, it may make sense to maximise this rate.
By contrast, anyone with reason to think they may not reach average life expectancy should almost certainly take their state pension as soon as they can. If you do not need the income, you can save or invest it, so that the cash is available to your heirs. State-pension benefits, on the other hand, cannot usually be passed on.
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.
SoftBank’s shares slump on quarterly loss
Japanese investment group SoftBank’s technology funds have struggled, not least because of an investment in WeWork.
By Dr Matthew Partridge Published
Nationwide: UK house prices creep up by 0.2% - are we heading for a rebound?
Nationwide’s latest house price index shows property prices inched up by 0.2% as demand warms up - will this trend go into 2024?
By Kalpana Fitzpatrick Published
How to cut the cost of home insurance
Home insurance policies are becoming increasingly expensive, but there are several ways you can keep costs down.
By Ruth Jackson-Kirby Published
Are lifestyle funds still fit for purpose?
Lifestyle funds have failed to do what they were supposed to do – shield savers from risk in the run-up to retirement.
By David Prosser Published
NatWest-owned Ulster bank boosts easy access savings rate to 5.2%
Rates on easy access savings accounts have hit over 5%, with Ulster Bank now giving savers the chance to earn 5.2% on their cash savings. We have all the details.
By Marc Shoffman Published
Moneybox raises market-leading cash ISA to 5%
Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
By Ruth Emery Published
October NS&I Premium Bonds winners - check now to see what you won
NS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
By Kalpana Fitzpatrick Published
October’s NS&I Premium Bond winners revealed - have you scooped £1 million?
Two lucky NS&I Premium Bond winners are now millionaires this October. Find out here you are one of them
By Kalpana Fitzpatrick Published
The best packaged bank accounts
Advice Packaged bank accounts can offer great value with useful additional perks – but get it wrong and you could be out of pocket
By Tom Higgins Published
Energy bills to fall 7% under new price cap
Energy bills could fall by an average 7% from October under the new Energy Price cap announced today. We explain what the new cap mean for you and when it will come into play
By Pedro Gonçalves Published