State Pension Deferral: A Comprehensive Guide

Key Points

* Delaying your state pension payments can lead to higher monthly amounts upon claiming.
* However, there are potential drawbacks and tax implications to consider.
* The decision of whether to defer depends on factors such as your life expectancy, income, and tax situation.

Benefits of Deferring Your State Pension

* Increased Payments: For every nine weeks you defer, you receive an additional 1% on top of your regular payment.
* Guaranteed Income Increase: The triple lock mechanism ensures that your increased state pension amount will rise annually by at least 2.5%.
* Tax Savings: If your income drops before claiming your state pension, you may pay less tax on your payments.

Drawbacks of Deferring Your State Pension

* Potential Loss of Income: The state pension increases each year, and it may take 19-20 years to break even on deferred payments.
* Reduced Income During Deferral Period: You will receive less money during the time you defer.
* Tax Implications: Income from the state pension is taxable, so deferring may impact your tax bracket and increase your overall tax liability.

Eligibility and Process

* Anyone can defer their state pension.
* No action is required, as your pension payments will not commence until claimed.
* There is no maximum deferral period, and you continue to accumulate funds for every nine weeks you wait.

Calculating Deferred Amounts

* Currently, you would receive an extra £2.21 per week, or £115 per year, for every nine weeks you defer.
* For a full year of deferral, the 5.8% increase would add £667 to your annual state pension payment.

Navigating Higher Tax Brackets

* State pension income is taxable, so tax implications must be considered.
* Deferring may be beneficial if your income drops into a lower tax bracket upon retirement.
* It may not be beneficial to defer if doing so pushes you into a higher tax bracket.

Is Deferring Still Worth It?

* Opinions vary depending on the state pension system you are eligible for.
* The extra amount received from deferring the new state pension is approximately half of what was available under the old system.
* An alternative to deferral is to receive your payments and invest them in an Isa for potential growth.

FAQs

* Can I defer after starting my state pension? Yes, but only once.
* Can I defer while working? Yes, your employment status does not affect your ability to defer or claim your state pension.
* What happens if I am on the old state pension? You can still defer and receive 1% for every five weeks of deferral.
* What happens if I retire abroad? You can still defer, but your increased payments will be frozen at the level they were when you left the UK, unless you live in a country with a social security agreement.
* What happens when I die? For the old state pension, your partner may be able to inherit your deferred payments. For the new state pension, they cannot.