In the UK, individuals can start claiming their state pension from the age of 66. However, those who choose to defer or pause their pension payments may significantly increase the amount they eventually receive. This strategy, known as deferring the state pension, can be a valuable tool for boosting retirement income.
Deferring the state pension means electing not to begin receiving payments as soon as you reach the eligible age. By doing so, your weekly pension payment rises by a set percentage depending on the type of pension you receive. According to Money Helper, those on the new state pension can increase their weekly payments by 1% for every nine weeks they defer. For recipients of the basic state pension—which is set to offer around £9,615 annually from next April—the increase is 1% for every five weeks deferred.
Many individuals take this route if they continue working beyond state pension age. It allows them to build a larger pension pot, helping sustain their retirement lifestyle when they eventually retire fully. Deferring is simple; you need do nothing once you reach state pension age and choose not to claim your payments—they will automatically be deferred.
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Even if you’ve already started to receive your state pension, you can still opt to pause payments. This pause will provide the same benefit as deferring from the outset. If you defer for less than 12 months, you have the option to receive backdated payments in a lump sum instead of increasing your future weekly payments.
However, deferring your state pension is not ideal for everyone. It can impact eligibility for certain benefits, including Winter Fuel Payments and Pension Credit. Additionally, increasing your income could push you into a higher tax bracket depending on your total annual earnings.
For those opting for a lump sum back payment, tax is calculated based on the total income for the tax year the payments would have originally been received. As Money Helper advises, delaying or stopping your state pension leads to bigger payments later, but over a shorter period. Since the state pension usually stops upon death—unless your spouse or civil partner inherits it—you must consider your and your partner’s life expectancy to decide if deferring is financially beneficial.
Ultimately, weighing the advantages and potential drawbacks will help you make the most informed decision regarding your state pension strategy.