Most people don't realise that you do not have to claim your state pension once you reach your State Pension age. (If you do not know when your state pension age is then find out by using this State Pension age calculator). In fact, 90% of people immediately start drawing their State Pension as soon as they become entitled to it. However, they could boost the size of their eventual State Pension by choosing to defer it for a period of time instead.
Deferring your State Pension
When you reach State Retirement Age (SRA) you do not automatically start receiving your State Pension, you have to opt to do so. But if you instead chose to defer taking your State Pension then:
- For every 5 weeks you delay, your State Pension entitlement will go up by 1.01%.
- Or in other words, delay claiming your State Pension for a year, and you will get a 10.4% increase in your State Pension until you die! Don't forget that the State Pension and this increase are inflation linked.
- So roughly speaking if you delay drawing your pension for 5 years you can expect a 50% increase in your State Pension.
Of course this has to be weighed up against the State Pension payments you will not receive during your deferral period. If you were to start claiming your State Pension and then immediately die you (and your estate) would be worse of. So there is a period of time which you would need to survive before you end up in a better net position than if you'd simply drawn your State Pension as soon as you were entitled to it.
The exact time frame will depend on your initial State Pension entitlement and how long you deferred for. But as rough guide. If you are entitled to a full Basic State Pension, then following a 2 year deferral and the corresponding uplift in your pension entitlement it would take around 10 years after claiming before you'd are better off.
If you deferred for 5 years then the sweet spot to be better off would be nearer 15 years after you started claiming. But obviously no one can predict how long they will live.
Take a lump sum instead
However, if you do defer your State Pension, rather than take an increase in your subsequent State Pension you could take a lump sum instead. The lump sum would equate to the missed income plus interest at 2% above the Bank of England base rate (currently 0.5%) That might not sound great but it's better than a lot of savings accounts.
You can even defer if you've already started claiming your State Pension
Believe it or not you can and I cover this in detail in my answer to the 'Reader Question: I have been retired for 10 years, can I now defer my State Pension?'
But this giveaway won't last
As it stands the rate at which your pension increases due to deferment will be cut from 1.01% to 0.5% in 2016 with the introduction of the new flat-rate State Pension, at which point deferring is unlikely to be attractive.
The catches to deferring your State Pension
Aside from the fact that you need to live longer to break even (as mentioned above) if you are getting means tested benefits then any boost in your State Pension will count as income and may affect these benefits
How do you defer your State Pension?
As you don't automatically start receiving your State Pension (you have to submit the claim form sent to you in the post) then you can defer your State Pension by simply doing nothing.
- State Pension age calculator
- How do I find out how much state pension you will get when you retire
- Reader Question: I have been retired for 10 years, can I now defer my State Pension?'
- Reader Question: Will deferring my State Pension affect my benefits? Is there any point?
- Reader’s Question – What happens to my deferred State Pension if I die?