When you reach state pension age at 66 (rising to 67 by 2028 and 68 by 2044) you will be offered the option to defer your state pension. On the face of it this can look attractive if you don’t need the money immediately.
By deferring the state pension you can increase the income that you will then receive when you do eventually draw it. This increase used to be 10.4%. So a state pension of £10,000 per year, deferred for a year would give you £11,400 per year and so on.
That rate of increase worked for some people in the past but not for the majority. Although it sounds an attractive rate of increase, of course what most people forget to factor in, is the fact that they have missed out on a whole year’s worth of income. They may be up by £1,400 from year two onwards but they are still £10,000 down from their first year. For those still working and paying very high rates of income tax it could be beneficial to defer if they weren’t going to ‘net’ much of that £10,000 anyway. However at a lot of people living to average life expectancy would be worse off.
Since then the situation has become worse as the increase for deferral is now only 5.8%. So you lose that £10,000 in year one and only get £10,580 per year in year two. Even worse is the fact that the increase element (£580 per year) does not benefit from the triple lock increase of the main state pension but instead is only increased in line with the Consumer Price Index (CPI), which is generally the lowest of the three inflation rates used to calculate the triple lock.
So generally speaking, it isn’t worth deferring state pension but you should seek advice before making the decision.
We advise Phoenix staff on a wide variety of issues, including state pension top-ups and deferrals, from our office in Hook, Hampshire and throughout the UK.
