Delaying the age at which you take your State Pension, called pension deferral, gives you higher retirement income when you finally do take it. That extra income will continue every year for the rest of your life. But is this really a good deal?
Deferring is actually the simpler option. The Government will write to you roughly two months before you turn 66 and ask if you want to draw your State Pension.
Most people reply to say they want to start taking the State Pension straight away. If you do nothing, deferral is automatic.
For every nine weeks you defer, you will get one percent extra State Pension a year. By deferring for a full year, you will get 5.8 percent more.
That would give you an extra £ 10.74 a week from age 67, which adds up to £ 558.48 a year in total. You could defer for longer than that if you wish, and get even more. Minimum deferral period is five weeks.
These figures apply to those who retire on the new State Pension, which came into force on April 6, 2016.
It is unlikely that many on the old State Pension will be able to defer now, as even the youngest will be in their early 70s.
Deferring works best for those who are fit, well and want to continue working, said Becky O’Connor, head of savings and investments at Interactive Investor. “If you tick all those boxes, it is worth considering.”
There is another advantage.
If you are employee, working for longer should also mean you can pay into a workplace pension scheme for longer, which should further boost your income when you finally retire, O’Connor added.
Deferring is actually the more straightforward option, said Alice Haine, personal finance analyst at wealth platform Bestinvest. “Roughly two months before your 66th birthday you will receive a letter giving you two options, to claim or defer your State Pension.
“If you want to delay, you don’t need to do anything. It will automatically be deferred until you start claiming it.”
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Deferring could work for those who have not yet built up the 35 years of qualifying National Insurance contributions needed to receive the maximum new State Pension, Haine said.
Working on and making NI contributions could help make up the shortfall. “This might work for women who took time out to care for children or elderly relations, workers who took a lengthy career break, or were self-employed with low earnings.”
This might also apply to expatriates returning from working overseas who did not make voluntary contributions while they were away.
Haine added: “By making your NI contributions you will get more State Pension when you finally do claim, on top of the extra from deferring it.”
Workers on a good salary who want to push on beyond 66 also have an incentive to defer their State Pension. That’s because State Pension payments could push them into a higher tax bracket once added to their total annual income from all other sources.
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Haine added: “It might make sense to defer taking your State Pension to lower your income tax burden, particularly if taking it would push you into a higher-rate tax bracket.”
Inevitably, there is also a downside to deferring. If you defer for a year you will currently sacrifice £ 9,627 of State Pension, and it can take years to make this up, if you ever do.
Typically, you will have to live for another 15 years to break even, depending on how rapidly the State Pension rises in future, O’Connor said.
“So you have to live to at least 81 or 82 for your decision to pay off. The longer you live after that, the more you will have profited from your decision.”
Also, many people have had their filll of working by age 66, while those doing manual jobs would prefer the flexibility to take their State Pension EARLY instead of later. This is not currently an option.
If tempted, deferring is a complex decision with both pros and cons, but for the majority of us it’s a no-brainer. Most people need their State Pension as soon as they can claim it, especially today, as living costs rocket. And that’s what nine out of 10 of us choose to do.