Deferring your state pension can give you higher payments – but there’s a catch

A little known secret about your state pension is that holding off your payments could mean getting far higher payments when you do decide to claim.

To see any benefit, you’ll need to defer your state pension payments for at least nine weeks; beyond that, each nine weeks you put off your payments means you can receive the equivalent of an extra 1pc on top of the usual payment amount when you come to claim.

This works out at around 5.8pc extra each year, which will be paid at the same time as your usual state pension payments. 

However, deferring doesn’t work for everyone, and there are some catches to navigate – from betting on your life expectancy to potential tax implications. Here, Telegraph Money sets out who could benefit, and how to avoid the pitfalls.

How much extra could you get by deferring?

State pension payments are not automatic; if you’ve made enough National Insurance contributions (NICs) by the time you reach state pension age to qualify, then you can either choose to claim it, or defer it.

Around two months before you reach state pension age, you should receive a letter setting out your options and explaining what to do.

The full new state pension for people who reach retirement age after 2016 is £203.85 per week, or £10,600 per year for 2023-24. Assuming the 5.8pc increase, every year you defer your state pension, an extra £614.64 is added to what you’d receive annually.

Alternatively, you can look at it as an extra £11.82 a week.

Under the triple lock, this will also increase each year by at least 2.5pc. Natalie Kempster, of financial planner Argentis Wealth Management, explained: “The magic of compounding – assuming a 2.5pc increase – means that deferring for just one year would give you an extra £11,000 over 15 years, and the impact of this is exponential when you defer for longer.”

Betting on life expectancy

Deferring your state pension does come with a catch: if you die before the “break even point”, you could end up receiving less money overall.

To defer your pension by one year, you would need to live until at least 81 to break even; pass away any earlier and you’d have received less than someone who hadn’t deferred.

Deferring your state pension payments by two years would add an extra £1,228 to your pension pot, but you’d need to live until age 82 to break even compared to those who start receiving payments at 66.

Jason Coppard, a chartered financial planner at Lumin Wealth, said deferring is unlikely to be the appropriate starting position for the majority of people, as retiring from work will have caused a significant reduction in regular income, and many have serious concerns about living past 81.

However, life expectancy tables from the Office for National Statistics (ONS) suggest the average retiree needn’t worry. Its 2020 figures showed that 65-year-old men could expect to live on average a further 19.7 years, to 84, and 65-year-old women a further 22 years, to 87.

This is projected to rise to 21.9 years for men in this age bracket, and to 24.1 years for women by 2045.

Don’t get stung by tax brackets

Income from the state pension forms part of your overall taxable earnings, so if you are still working and claiming the state pension were to tip you into higher or additional-rate tax, you’ll be giving up a lot of your pension payments to the taxman, Ms Kempster warned.

She explained: “Someone earning £150,000 per year would effectively pay 45pc tax on their state pension, meaning that they would net just £5,830. Defer your pension until the following year, when you are retired and a basic-rate taxpayer, then the numbers start to look a whole lot more favourable.”

If you reached, or will reach, state pension age after April 6, 2016, you can only receive deferred state pension in the form of regular increased payments, which will be taxed as earned income.

Dean Butler, Standard Life’s retail managing director, said this means you should also consider whether taking a higher income later might push you into a higher tax band, as opposed to taking a lower income from an earlier date.

If you reached state pension age before April 6, 2016, you have the option to take the extra payment from a deferral as a lump sum, which again will be subject to tax.

Is deferring still worth it?

Historically, deferring state pension payments was something a lot of people did because there was a significant uplift to be had, and there was the option to take the deferred payments as a lump sum.

Claire Trott, retirement and planning director at St James’s Place, said since the changes in 2016 to the new flat rate state pension, the interest you accrue by deferring has nearly halved.

Deferred payments are also lost now if you die before claiming; this is not the case for those who reached state pension age before April 6 2016.

Ms Trott said the 2016 changes have made deferral less appealing because there are more drawbacks to taking the income, which she feels “outweigh the benefits”.

Andrew Tully, technical director at Canada Life, also reckons for those who reach state pension age after April 6, 2016, deferring their state pension is not an amazing deal because of the 17 years it takes to break even.

He said an alternative to deferring your state pension payments could be to take the pension payments and use them to invest in, say, an ISA.

He explained: “That means you have access to that at any point, and it may grow over time.

“People can also choose to stop receiving the state pension after it comes into payment – but you can only do this once. It works in the same way as deferring, so when you re-start you get a higher pension.”