Is it worth deferring my state pension?

A little-known secret about your state pension is that holding off your payments could mean getting higher amount when you do decide to claim. If you live a long time, that could net you thousands of pounds.

But it doesn’t work for everyone, and there are some catches to navigate – from gambling on your own life expectancy to potential tax implications. 

Here, Telegraph Money sets out who could benefit, and how it affects you and the best way to avoid some significant drawbacks.

Is deferring worth it? 

Delaying your state pension payments can mean you’ll get more when you do come to claim, but this move isn’t suited to everyone.

Benefits of deferring state pension payments 

If you’re on the new state pension you’ll need to defer your state pension payments for at least nine weeks to benefit. Each nine weeks you put off receiving them means you get the equivalent of an extra 1pc on top of the usual payment amount when you do decide to claim.

This stacks up to 5.8pc extra a year, every year, and that’s on top of your existing payments. That means you will have more money coming in, and it’s guaranteed for life.

Under the triple lock, this extra amount will also increase each year by at least 2.5pc. Due to higher inflation, it actually increased by 10.1pc last year and will rise 8.5pc this year.

Natalie Kempster, of financial planner Argentis Wealth Management, explained: “The magic of compounding – assuming a 2.5pc increase – means that deferring for just one year would give you an extra £11,000 over 15 years, and the impact of this is exponential when you defer for longer.”

Deferring drawbacks

However, there are some major potential pitfalls to deferring, and you’ll need to carefully consider these. The most important one is that if you die before the “break even point”, you could end up receiving less money overall.

Due to the fact that the state pension changes every year, and not usually by the same amount, it’s difficult to predict with any certainty what the break even point is. It’s generally accepted that it takes between 19 and 20 years from state pension age, regardless of how many years you defer for. 

Life expectancy tables from the Office for National Statistics (ONS) imply that in this regard, deferring is something of a gamble. Its 2020 latest figures showed that 65-year-old men could can expect to live on average a further 18.3 years, to 83, and 65-year-old women a further 20.8 years, to nearly 86.

This is projected to rise to 21.9 years for men in this age bracket, and to 24.1 years for women by 2045.

What is more predictable is how this could negatively affect your tax bill, which we also discuss below.

Am I eligible and how does it work?

Anyone can defer their state pension. You don’t need to do anything, as your state pension won’t start until you actually claim it. This is done online, over the phone or by post, but you should get a letter explaining all this shortly before you reach state pension age.

There’s no maximum amount of time you can defer for, and you’ll keep building up money for every nine weeks you wait.

However, it is crucial to also bear in mind that if you or your partner are claiming certain benefits, such as Pension Credit or Universal Credit, you will not build up extra money by deferring during that time.

If you’re planning on continuing to claim those, it’s unlikely that deferral will be the right option for you.