Should you defer your state pension and stay in work?

Seventy is the new 50, the International Monetary Fund (IMF) declared in April, in a report which found in many countries, people are not only living longer but also aging in better health – and so enjoying longer and more productive working lives.

The state pension age in the UK is currently 66. Yet 1.12 million people this age and older (9.5%) remain working, according to the UK's Annual Population Survey from last summer.

As the IMF found, on average, a person who was 70 in 2022 had the same cognitive ability as a 53-year-old in 2000. Physical health had also significantly improved, with 70-year-olds displaying the same fitness as 56-year-olds did 25 years ago.

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The findings suggest baby boomers have lots of scope to continue working longer if they chose or needed to, and could potentially hold off on drawing their pension.

The benefits of working longer can be social and financial – the IMF found those who stayed employed enjoyed a 30% rise in earnings – so it could be worth deferring taking a pension until it's needed, not just when pension age is reached.

Waiting a bit longer for your pension can mean it’s bigger when you do take it, which, coupled with extra earnings from working longer, can really boost a retirement fund.

Can you defer a state pension?

If you are approaching state pension age (currently 66, rising to 67 by 2028) and think you can manage without the state pension for a while – maybe you are still working, have enough private pension income or are happy to live off tax-free sources like ISAs – choosing to defer the state pension could be a good idea.

Deferring your state pension to begin receiving it at a later date will boost how much you get each week when you do take it.

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 the basic state pension

Those who reached state pension age before 6th 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.

Time spent in prison or when you or your partner get certain benefits does not count towards the five weeks.

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

For example, says 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).

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 current rate on your lump sum payment. So, if you’re a basic rate taxpayer your lump sum will be taxed at 20%, 40% for higher and 45% for additional.

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

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: “If you think you can do without it for a bit, then for every nine weeks you defer your new state pension increases by the equivalent of 1%.

“This works out as just under 5.8% for every 52 weeks.”

So 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).

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

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.

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, how long it will take to make that money back to make sure you really get your money’s worth from deferring.

For example if you’re not in good health, you may not reap the full benefit of deferring a year of the new state pension – which will take around 17 years to pay back out to you in higher pension payments.

Another point to note is you cannot build up any extra pension if you or your partner are receiving certain benefits, such as pension credit or carer’s allowance.

However you can still defer your state pension if you have already started taking it – but only once.

Webb says: “One group for whom deferral can be attractive is those who work on past pension age.

“You may not want your state pension taxed in full at your marginal rate on top of your earnings, so you can take your state pension at a higher rate at a later date when the tax position will be more favourable,” he says.

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 it’s also worth saying that markets can fall during this period too.

“Also 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. 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.