State Pension Deferral

When advising clients, we are often asked how state pension deferral works. Whilst the state pension is a complex area, we have provided our interpretation of the current rules surrounding this.

Under current legislation, the State Pension does not have to be taken at the State Pension age. It can be deferred indefinitely and taken in the future either in the form of either an increased income or as a lump sum. This applies to the basic state pension as well as the second state pension (S2P), state earnings related pension scheme (SERPS) and the graduated retirement benefit.

Increased Income

If the claim for State Pension is deferred for at least five weeks, the original pension due at state pension age will be increased by 1% for every five weeks that the pension is deferred (0.2% per week) – this is the equivalent to 10.4% for each full year deferred.

For example, someone reaching State Pension age with a pension entitlement of £100 a week and choosing to defer their State Pension for five years would earn an extra pension of £52 a week for the rest of their life.

However, they have done without an income of at least £26,000 (excluding any increases in the state pension during the deferment period).

Lump Sum

As an alternative to taking a higher income illustrated above, after the period of deferment, the individual also has the option of taking a lump sum. To qualify for this, the pension must be deferred for at least a year.  The lump sum is based on the amount of weekly State Pension the individual would receive plus interest at 2% above the Bank of England base rate. When the State Pension is eventually claimed, it will be at the same rate as it would have been had it not been deferred.

This is often misunderstood and clients sometimes think they will be better off deferring their entitlement. However, please remember that you will have to forego receipt of the income during the deferment period.

Weighing up the Risks

If you are deferring your state pension, and choose to receive an income in the future, how long would it take for you to recoup what you have given up through deferral?

How long would you have to live before you were in profit again?

What are the risks if you don’t survive?

This is especially relevant as we are currently entitled to a state pension from age 65 (subject to sufficient national insurance contributions).

Can I stop my State Pension once it has started?

In short, yes. If an individual is receiving their State Pension, they can cancel their claim to the State Pension and have it deferred. The pension will stop until the individual chooses to claim it again. It should be noted that this can be done only once – when the pension restarts, it cannot be deferred again.

Once restarted, as before, the State Pension will be increased to take account of the period of deferment. Alternatively, if deferred for at least a year, a lump sum can be taken.

Would you like to know more?

If you ‘d like to know more about how we can help you to plan for and during retirement, please feel to call us on 01626 833225 to find out more or to arrange an initial complimentary meeting.

We can also offer telephone based support as well as more traditional face to face meetings.