Should you defer your state pension and stay in work?

Two-thirds of people aged 40 to 65 are unaware that they can defer their state pension and boost their retirement income.

This is according to analysis by retirement specialist Just Group of data published by the Department for Work and Pensions (DWP).

Of the 34% who did know they could delay receiving their state pension, a third (33%) were unsure what the impact of deferring would be on their regular payments and an additional 8% either thought they would receive the same amount or less.

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However, the government boosts the state pension for every week that someone defers claiming it beyond state pension age (currently 66).

If you continue working past your 66th birthday, then by the time you retire, the extra money you earned plus any additional pension contributions you make – in addition to a larger state pension – could make a huge difference to your overall retirement income.

The analysis found that about one in 10 adults aged 66 to 75 have delayed receiving their state pension.

Reasons include wanting the higher income later in retirement, no need to claim the money immediately, and still being in work.

Stephen Lowe at Just Group comments: “Delaying the state pension may not work for everybody but it’s certainly an option worth knowing about and exploring in more detail for those people who don’t need the money immediately.

“If you’re still working, deferring could help reduce your income tax bill in the short term and boost your pension income in later years when it may be needed more.”

According to a Freedom of Information request submitted to the DWP by The Sun, people who reached state pension age before 6 April 2016, deferred for at least 12 months and decided to take the top-up as a lump sum, received £9,658 on average as of November last year.

Those who reached state pension age on or after 6 April 2016, and deferred received on average £16.77 extra per week as of November. That works out at an annual top-up of £872.

Deferring your state pension is a useful option if you have other income sources and don’t need the money just yet. For example, you’re still working, or have rental income or money from other pensions or ISAs.

In many countries, people are not only living longer but also ageing in better health – and so enjoying longer and more productive working lives.

In the UK, more than one million people past state pension age remain working, according to the Office for National Statistics’ Annual Population Survey from last summer.

A report by the International Monetary Fund found that, 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.

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

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.

When asked why they deferred the state pension, the Just Group analysis found that the most popular options were either because people did not need financially to claim it as soon as they reached the state pension age (49%) or because they were attracted to the higher income later (48%).

A fifth (20%) also wanted to wait until they had stopped working before they claimed the state pension.

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, 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). 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 unfortunately.

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.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: “Deferring your state pension is a great way of giving your pension a boost in the future if you don’t need the money right now. It could be the difference between you paying a higher rate of tax for instance, so not claiming it could save you money.”

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.

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. According to Justin Corliss, pensions expert at Royal London, you’ll need to live for 14 years or until age 80, once you do start claiming in order to actually end up better off overall (assuming you’re a basic-rate taxpayer both in work and retirement).

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.

Corliss comments: “There are various reasons why you might want to delay taking your state pension. You might still be working. Say you work part-time and earn £12,560. As that’s under the personal allowance, you won’t currently pay any income tax on those earnings.

“But if you take the full new state pension, it will then use up about £12,014 of your personal allowance, which means only £556 of your earnings will be tax-free, and anything above that will be taxed.”

However, Morrissey points out that retirees need to take a long-term view. “Receiving the money a bit later will boost your income and again 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,” she tells MoneyWeek.

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.

“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.