Working past the state pension age (SPA) has become increasingly common in recent years – yet many people still overlook one of the advantages of doing this.
It’s estimated that around 1.5 million people work past their SPA, which is currently 66 but scheduled to rise over the coming years. There are various reasons for this, including longer life expectancy, the demise of final salary pensions and the squeeze on living costs over the past 15 years.
But many of those working past their SPA still elect to start receiving their state pension payments straight away, even if they don’t need them. This means they’re missing out on a chance to increase the amount they get from their state pension by putting off receiving it for a few years.
Two thirds of people aged between 40 and 65 are unaware of the option to delay taking their state pension, according to analysis of government figures by retirement specialist Just Group. A third of those that did know about it weren’t sure if it would have any impact on the amount they could receive at a later date. So, how do you defer your state pension, and what do you need to think about before taking this step?
What does deferring my state pension involve?
It might be assumed that the government automatically starts paying your state pension from the day you reach your SPA. This isn’t the case, however – retirees need to take action in order to start receiving it. This is very straightforward, and the government sends information on how to claim it as you approach your SPA.
So, if you would prefer not to receive it straight away, you can opt to delay the payments for as long as you want. In doing this you’re making a trade-off between receiving your full state pension straight away or an increased pension later. Whether that is worth doing depends on your circumstances.
How much extra pension can I get?
Assuming you haven’t reached your SPA already, the extra pension you’ll get for deferring when you do is almost 5.8% for each year that you defer (as the state pension rises by the equivalent of 1% for every nine weeks deferred). Under the current full state pension of £230.25 a week, deferring for one year would give you an additional £13.35 a week (£694.20 a year, plus any inflation-linked increases) once you start taking it. The UK government website has a deferred state pension calculator where you can work out how much your state pension would be.
Who does this work best for?
It takes at least 15 years to break even if you defer the state pension for a year. In other words, that’s how long it would take for the additional payments over time to compensate for not having any payments in the first 12 months. For example, if you defer this year you’ll be giving up more than £11,000 in state pension payments.
If you’re in good health and have a lifestyle conducive to longer life expectancy, there’s a decent chance you’ll live long enough to benefit from a higher state pension later in retirement.
Who isn’t it suitable for?
If you’re in poor health or have a lifestyle that could impact your life expectancy, the length of time you’d have to wait before benefiting before deferral means it’s probably not a good idea to do it. You can’t build up any extra state pension if you’re on benefits including Universal Credit, Income Support, Pension Credit, Incapacity Benefit and more.
Choosing to defer your pension could affect the level of benefits you receive. So, if you receive benefits and you still want to defer, it’s important to let the Pension Service know.
How do I receive the extra payments?
You’ll get the option to receive your extra state pension as either higher weekly payments or in the form of a one-off lump sum. Most people opt to receive it as a weekly payment, which is paid alongside their normal state pension.
What else can I do to boost my pension pot?
There’s a whole range of things you can do to ensure you get a decent pension income in retirement, from maximising your contributions to tracking down lost pensions. We have five ways to boost your pension and if you’re close to retirement, we’ve got some of the steps you might want to start taking.
If you’re investing for retirement, you’ll need a well-diversified investment portfolio that is making your money work as hard as possible. This can include checking you’re not paying too much for your investments or your platform. Investment platforms offer fund and portfolio recommendations based on risk profiles, as well as tools such as portfolio builders, risk questionnaires and various calculators. To compare platforms, including fees and charges, use our free comparison tools.
Photo by Centre for Ageing Better on Unsplash
