Should you defer your pension and stay in work?

The pros and cons of deferring your pension and staying in employment beyond 66 are finely balanced. We look at how your retirement income could be affected.

(Image credit: Getty images)

Deferring your pension and staying in work is on trend right now.

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.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Nearly 100,000 early retirees have returned to work due to the cost of living crisis, according to data from the Office of National Statistics (ONS) in May 2023.

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

Plan your retirement income

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

With state pensions, while you can currently begin claiming 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 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. 

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 17 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 will get a boost.

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 savings – or vice versa. 

But watch out for one 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.

With contributions from