It could deliver a lifetime boost equivalent to £694 a year for those eligible
Brits are being urged to consider a little-known retirement trick which involves deferring the state pension. Doing so not only means no tax is deducted during the deferral but could also deliver a lifetime boost equivalent to £694 a year for those eligible.
According to MoneySavingExpert, pensioners who delay claiming their state pension can increase their eventual pension rate by up to 5.8% for each full year deferred. That works out – on current full new state pension levels – to around £13.35 extra a week or £694.20 over 52 weeks.
Because you are not receiving the pension while it is deferred, there is no tax to pay on that income during the waiting period. For retirees who continue to work, this can be especially valuable: your state pension would otherwise be added to your taxable income immediately.
How the boost works
Under the rules for those reaching state pension age on or after April 6, 2016, your pension increases by 1% for every nine weeks you defer, equivalent to approximately 5.8% per year. For instance, with a full new state pension income of £230.25 a week, deferring for a year would boost it by about £13.35 weekly – hence the £694 annual figure.
It is important to note, though, that any “backdated” payments (for delays up to 12 months) are taxed based on your income in the tax year when they were due.
Who benefits most?
This strategy is most useful for older people who are still earning – particularly those whose tax rates are likely to drop when they fully retire. By deferring, they avoid paying tax when rates are higher, and then benefit from a larger, taxable pension later when their other income is lower.
Financial commentators caution that deferral isn’t for everyone – you must weigh the “lost” payments during the deferral period against the extra income later, and also consider life expectancy, health, and other income sources.
PensionsAge reports that two-thirds of adults do not even know deferral is an option. It notes that deferring a full new state pension for a year yields an extra £13.35 a week – which over a whole year is £694.20. Royal London has also illustrated the tax benefit: in one example, an individual forgoes the pension for one year and avoids paying £2,394.60 in tax that year by deferring rather than taking it immediately.
Things to watch
While you are deferring, you receive no pension from the state – so this strategy only works if you can manage without that income. The extra rate you accrue continues for life and increases with inflation, but you must survive long enough to “recoup” your forgone pension payments.
If you choose to take a lump sum (possible for those who reached pension age before April 6, 2016), it is taxed at your highest income tax rate in the tax year you claim it. For backdated payments (up to 12 months), tax is calculated for the year those payments were due.