Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
What are the benefits of deferring my state pension?
I’ll be 66 in just under a year and so have started thinking about taking my state pension. My understanding is that I’ll get a 5.8% boost in the value of my state pension if I defer taking it by 12 months.
Is this right? If so, given current interest rates are close to 0% isn’t a 5.8% annual return a no-brainer for most people? Am I missing something?
Tom Selby, AJ Bell Senior Analyst says:
The state pension age is currently 66, with legislation mandating an increase to 67 in 2028. The full flat-rate state pension is currently worth £175.20 a week, although as discussed in last week’s column 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.
You can read more details about how this works here.
It is also 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 just under 5.8% for every 52 weeks.
This increase is applied to the flat-rate state pension. Based on someone receiving the full amount of £175.20 a week, a person who deferred for 52 weeks would get an extra £10.16 a week.
THE LIFE EXPECTANCY CALCULATION
Remember that when you defer your state pension you forgo an income. So, for example, someone entitled to the full flat-rate state pension of £175.20 a week in 2020/21 who defers taking it for a year has given up £9,110.40 of income in that first year in return for £10.16 extra a week for the rest of their life.
It’s therefore probably better to think about the state pension deferral calculation in terms of how long it could take for you to ‘break even’.
Based on the state pension increasing by 2.5% each year (the minimum possible annual increase under the terms of the ‘triple-lock’), it could take 15 years to take as much total income via deferral as you could have done by taking the state pension at age 66.
For someone with a state pension age of 66, this implies the point at which they might be in ‘profit’ from deferring the state pension could be around age 81.
Given average life expectancy for a 66-year-old man is 85 and a 66-year-old woman is 87, this suggests that, provided you are in good health, delaying receiving your state pension is likely to pay off financially.
However, this might not be the case for anyone with health or lifestyle factors which might reduce their life expectancy.
Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.