Should you defer your pension and stay in work?

A quarter of people approaching retirement are unaware they can defer receiving their state pension. Deferring could make sense if you're still working and don't need the income immediately. We look at how it works, and the pros and cons.

(Image credit: Getty images)

Britons are staying in work longer and in larger numbers than ever before. Around 8% of people aged over 66 – the age at which you can currently begin claiming the state pension – are still in employment, according to research from the Centre for Economics and Business Research and Legal & General Retail Retirement, with the figure set to hit 11% by 2030. 

In some cases, people are staying in work longer out of financial necessity: high energy bills, soaring food costs and credit card struggles are just some of the reasons why. 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. You will receive about 5.8% more pension for each year that you put off taking the money.

If you don’t need your pension because you can live on your employment earnings, deferring this year’s £203.85 full weekly state pension for 12 months, say, would entitle you to claim an extra £11.82 a week - or £614.64 a year. 

With the triple lock boosting the state pension to £221.20 a week from April, those who defer their payments for the 2024/2025 financial year will benefit from an extra £12.78 a week – which equates to £664.58 of additional payments across an entire 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. In theory, that’s around 18 years – taking people close to the average life expectancy, so 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. 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.

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.