There’s often a lot of talk about the State Pension Age rising and the impact it could have on retirement plans. But, in certain circumstances, delaying your State Pension payments could pay off.
The State Pension Age is currently 65, but is gradually increasing and will reach 67 by 2028. You can use the government’s State Pension Age checker to see when you’ll be able to claim the State Pension. Remember, the State Pension Age is under review, so it could rise if your retirement is still some way off.
It’s also important to note that you don’t have to start claiming your State Pension when you reach State Pension Age – you can defer it.
If you choose to delay taking your State Pension, it will increase by 1% for every nine weeks that you defer. Delay accessing it for a year and your State Pension will increase by just under 5.8% (10.4% if you reached State Pension Age on or before 6 April 2016). In monetary terms, that would increase the full State Pension by £10.42 per week, from £179.60 to £190.02. The State Pension increases each tax year, so the amount you receive could be larger the longer you defer.
If you defer your State Pension by at least 12 months, you may be able to take a lump sum rather than increasing payments. This will include interest of 2% above the Bank of England base rate, which is currently 0.1%. This is not an option for anyone who qualifies for the State Pension on or after 6 April 2016.
You should consider your life expectancy and health when deciding whether to defer your State Pension. If you reached State Pension Age after 6 April 2016, deferring for a year would mean it takes 17 years for deferring to pay off financially.
However, delaying your State Pension can make sense in some circumstances, including when:
You’re working past the State Pension Age
More people are choosing to work past the State Pension Age for a variety of reasons. If you’re receiving a regular salary, taking the State Pension could mean you pay more Income Tax and potentially get pushed into a higher tax bracket. Deferring your State Pension until you’re ready to give up work can reduce your overall tax bill and increase your income in the future.
You have a retirement income from other sources
Much like earning a salary, if you’re receiving an income from other sources, such as a defined benefit pension, deferring your State Pension can also make sense from a tax perspective. You may also choose to first use savings that are earning little interest in the current climate, or other assets. Keep in mind that your life expectancy will impact how much you benefit.
You’re healthy and want to increase your income in later years
If you have other sources of income and are in good health, deferring your State Pension can provide you with more income to enjoy in your later years. If you defer for several years, you can create a more comfortable retirement.
You’ve retired abroad to a country that isn’t subject to pension annual increases
If you’ve decided to retire abroad, you may not benefit from the State Pension annual increases. This means your State Pension won’t keep up with the cost of living and will fall in value in real terms. Deferring your State Pension can increase your income and help it keep pace with inflation during the years you’re not claiming it.
Deferring your State Pension and Income Tax
While deferring your State Pension can make sense from a tax perspective, you also need to consider the long-term tax implications.
Any income you receive from the State Pension, whether as a regular income or a lump sum, may be liable for Income Tax if your total income exceeds the Personal Allowance (£12,570 for 2021/22). As a result, deferring your State Pension could mean you end up paying more tax later in life.
If you’re not sure if deferring the State Pension is the right option for you, please get in touch. We’ll help you understand the short- and long-term implications of the decision.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.