Does it make sense to defer taking the state pension?

Tom Selby
7 April 2021

•    Deferring taking your state pension could deliver thousands of pounds in extra retirement income for those who live to a ripe old age, analysis from AJ Bell shows
•    Someone who defers receiving the state pension for 12 months will receive a 5.8% boost to the value of their payment when they start drawing it
•    Assuming the state pension increases by 2.5% each year, they could be in ‘profit’ from a 12-month deferral after 15 years
•    Average life expectancy at age 66 is 19 years for a man and 21 years for a woman, according to the ONS (https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07)
•    Health, income and lifestyle will all impact on people’s decision on whether state pension deferral is the right option

Tom Selby, senior analyst at AJ Bell, comments:

“For many people the state pension age will be viewed as something set in stone which cannot – or perhaps should not – be shifted. However, if you are in good health and have enough income to support your lifestyle in retirement then deferring receipt of the state pension could be a savvy move.

“Someone who defers taking their state pension by 12 months would get a 5.8% boost to their income for the rest of their lives. That is equivalent to around £10.41 a week for someone entitled to the full £179.60 a week flat-rate state pension in 2021/22. 

“If we assume the state pension grows by 2.5% a year – the minimum level of increase under the ‘triple-lock’ – it could take 15 years for the total retirement income they received to exceed what they would have got if they hadn’t deferred. 

“From that point onwards, every year of state pension the person receives will deliver bonus income as a result of the deferral.

“If, for example, they lived until age 90, they could receive over £7,000 more in retirement income by deferring the state pension by 12 months. If they reach their 100th birthday, the decision to defer could pay off to the tune of £18,000.”

Considerations for those considering deferring the state pension

“Although deferring the state pension will be a good option for some, it will not be possible or desirable for others. 

“Those who need the money as soon as possible might be less tempted by the increased income they could receive in the future, while for those with underlying health conditions the likelihood they live long enough to benefit from deferral will be reduced.

“People also need to consider how a higher state pension payment might interact with other means-tested benefits they are currently entitled to. 

“However, in lots of cases the generous deferral rate on offer means it should at least be considered when devising your retirement income strategy.”

 

Age

 

 

 

Total retirement income

70

80

90

100

State pension deferred 12 months

£31,150

£153,341

£309,756

£509,980

State pension taken at age 66

£38,781

£154,274

£302,114

£491,362

Assumptions: Based on full flat-rate state pension of £179.60 a week (2021/22) deferred for 12 months; state pension age = 66; state pension increases each year by 2.5%

Background

The state pension age is currently 66, with legislation mandating an increase to 67 in 2028. The full flat-rate state pension is worth £179.60 a week in 2021/22, although not everyone will get this amount.

For example, people who have a National Insurance (NI) contribution record below 35 years will have a deduction applied, as will those who ‘contracted out’ of the additional state pension before 2016 in return for lower NI contributions.

It is possible to delay the date at which you start receiving your state pension in return for an uplift in your weekly payment.

For anyone who reached state pension age on or after 6 April 2016, the deferral rate is 1% for every 9 weeks they defer, or around 5.8% for every 52 weeks. 

This increase is applied to the flat-rate state pension, and you need to defer for at least 9 weeks to qualify for an uplift.

You can find more details about how state pension deferral works here: https://www.gov.uk/deferring-state-pension

Tom Selby
Senior Analyst

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

Contact details

Mobile: 07702 858 234
Email: tom.selby@ajbell.co.uk

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