Should you defer your pension and stay in work?

Britons are staying in work longer and in larger numbers than ever before. You can currently start claiming your state pension at 66, but the latest government figures show that 30% of people are still in employment at this age.

In some cases, people are staying in work out of financial necessity: high energy bills, ultra-long mortgages and credit card struggles are just some of the reasons. Women often face a smaller pension pot when they come to retire too.

In other cases, people stay in work for the social contact and routine it provides. It's a personal choice.

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For those continuing to work past state pension age, it could make sense to defer the state pension. However, many people are unaware of this option.

A survey of 1,050 retired and semi-retired workers by retirement specialist Just Group revealed that a quarter (25%) of those aged 55-64 are unaware they can defer their state pension.

Women (26%) were significantly more likely than men (19%) not to know about the deferral option. Only 7% of the over-55s said they had used state pension deferral themselves.

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 your state pension

If you continue earning an income at an age when you are also entitled to claim the state pension, it is important to weigh up your options carefully.

While you can currently begin claiming the state pension from age 66 onwards, you don’t have to do so. The alternative is to defer taking the cash in return for a higher payment when you do finally start taking it.

Recipients of the new state pension are entitled to claim an extra 1% for every nine weeks they defer. This works out at just under 5.8% extra over the course of the year.

If you don’t currently need your pension because you can live on your employment earnings, deferring this year’s full weekly amount (£221.20) for 12 months would entitle you to claim an extra £12.82 a week – or £666.64 for the full year.

From next April, the triple lock is expected to boost the new state pension to £230.30 a week. This means those who defer their payments for the 2025/2026 financial year could benefit from around £13.31 extra a week – or around £691.92 over the course of a year.

Deferral is something of a gamble. You have to live long enough to receive more from your extra payments than the total pension you gave up during the deferral period.

Rob Morgan, spokesperson and chief analyst at investment management company Charles Stanley, says: “Very broadly, you'd need to live at least 20 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.”

In other words, it’s a finely judged decision. But the impact of tax might bring that figure down. If you defer taking your pension until you’re earning less and have moved into a lower tax bracket, you could receive more income overall.

“While deferring might not be the right option for everyone, it should still be something everyone knows about given that the state pension is widely considered a ‘bread and butter’ source of income in retirement," comments Stephen Lowe at Just Group.

“In some circumstances it can make sense to forego some income in the short term for a higher income in later life that is currently guaranteed to keep up with inflation [thanks to the triple lock].”

Think about your private pensions

Think carefully about private pensions too. In theory, you can begin drawing down money from private pension savings from the age of 55 (57 from 2028). But again, leaving the cash where it is for an extended period could boost its value when you do begin taking it.

If you’re a member of a defined benefit scheme, the longer you keep paying into the plan, the more guaranteed income you can look forward to.

In defined contribution plans like self-invested personal pensions (Sipps) and workplace schemes, you will be able to leave your savings invested for a longer period, and hopefully they will appreciate in value.

You may also be able to take a more aggressive approach with your investment strategy, if you know you don’t need to cash in your savings for an extended period.

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. But 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.