If you want to or need to worker longer than you’d planned, you might want to put off drawing your state pension. Let’s look at the options, benefits and risks…
You don’t have to claim your state pension when you reach state pension age; indeed, there might be some benefits from deferring it. You may also be able to choose when you take your private pension.
Remember that pension rules change from time to time, so we recommend taking independent advice about your personal financial situation before making the decision about whether or not to defer.
Deferring your state pension
Benefits: You’ll get extra money
- About 5.8% extra a year: It’s expected that, under new rules (due in 2015), a deferred state pension will grow by 1% for every 9 weeks you put off claiming. This means that for every year you defer your claim, you’ll get just under 5.8% extra. This applies to people reaching state pension age on or after 6 April 2016.
- 2% above base rate extra on a lump sum: You may take a lump sum if you defer claiming your state pension for 12 months in a row. It will have interest at 2% above the Bank of England base rate added to it.
You don’t have to do anything to defer your state pension: it will automatically be deferred until you claim it.
Risks: The pension rules may change
- 5.8% extra each year – but for how long? Until 2015, the gain for deferring had been set at 1% for every five weeks, working out at an extra 10.4% extra annually. This 2015 drop may not be the last. The government is free to change the rules whenever it wants, so keep an eye on how many weeks you need to work to gain 1% and decide whether it’s worth it.
- Tax on lump sums: Your lump sum is taxed at the highest rate that applies to your other income.
Deferring your defined contribution pension
Benefits: you’re likely to get extra money
- Bigger pension pot: If you carry on paying into your scheme, your pension pot is likely to increase.
- Longer investment term: Even if you don’t continue paying in, your pot will be invested for longer which may lead to a bigger pension if your fund’s investments perform well.
Risks: you’re not guaranteed extra money
- Smaller pension pot: If your investment’s value falls, you’ll have a smaller pension pot.
- Smaller pension overall: You may get more each month when you finally do draw your deferred pension. But the total amount you get overall may be lower, as it may take you many years to recoup the amount you would have received monthly had you drawn it earlier.
Deferring a defined benefit pension
Each employer’s defined benefit scheme, also known as a salary-related scheme, has its own terms. Check with the scheme administrator or trustees whether delaying it would increase your retirement income, and always take independent advice if you’re unsure of the right course of action.