Delaying the age at which you take your state pension, called pension deferral, gives you higher retirement income when you finally take it. This extra income will continue every year for the rest of your life. But is it really a good deal?
Deferring is actually the easiest option. The government will write to you about two months before you turn 66 and ask if you want to collect your state pension.
Most people reply that they want to start collecting the state pension right away. If you do nothing, the postponement is automatic.
For every nine weeks of deferral, you will receive one percent additional pension per year. By deferring for a full year, you will get 5.8% more.
This would give you an extra £10.74 per week from the age of 67, making a total of £558.48 per year. You can defer longer than that if you wish and get even more. The minimum deferral period is five weeks.
These figures apply to those retiring with the new state pension, which came into effect on April 6, 2016.
It is unlikely that many recipients of the old state pension will be able to differ now, because even the youngest will have in their early 70s.
Deferral works best for those who are fit, healthy and want to keep working, said Becky O’Connor, head of savings and investments at Interactive Investor. “If you tick all of those boxes, it’s worth considering.”
There is another advantage.
If you’re employed, working longer should also mean you can contribute to a workplace pension plan for longer, which should further boost your earnings when you finally retire, O’Connor added.
Deferring is actually the easiest option, said Alice Haine, personal finance analyst at wealth management platform Bestinvest. “About two months before your 66th birthday, you will receive a letter giving you two options, to apply or postpone your state pension.
“If you want to delay, you don’t have to do anything. It will automatically be postponed until you start claiming it.”
READ MORE: This woman has doubled her state pension to £300 a week.
The deferral could work for those who have not yet accrued the 35 years of eligible National Insurance contributions needed to receive the new maximum state pension, Haine said.
Working and making contributions to NI could help make up the shortfall. “It could work for women who took time off to care for children or elderly relationships, workers who took a long career break, or who were self-employed with low incomes.”
This could also apply to expats returning from overseas work who have not made voluntary contributions while away.
Haine added: “By paying your NI contributions, you will get more state pension when you finally claim, in addition to the deferral supplement.”
Well-paid workers who want to go beyond 66 are also encouraged to defer their state pension. Indeed, state pension payments could push them into a higher tax bracket when added to their total annual income from all other sources.
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Haine added: “It might be a good idea to defer taking your state pension to reduce your tax burden, particularly if it would push you into a higher tax bracket.”
Inevitably, there is also a downside to delaying. If you defer for a year, you will currently be sacrificing £9,627 in state pension, and it may take years to make up for that, if you ever do.
Typically, you’ll need to live another 15 years to break even, depending on how quickly the state pension increases in the 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 benefited from your decision.”
Also, many people have had their fill of work at the age of 66, while those in manual jobs would prefer to have the option of taking their state pension EARLY rather than later. This is currently not an option.
If you’re tempted, postponing is a complex decision with 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 when the cost of living is skyrocketing. And that’s what nine out of 10 of us choose to do.