OverviewThe State Pension – The new vs. the old scheme
Here we examine the differences between the old and the new State Pensions and the options open to clients should they wish to boost their entitlement by deferring their State Pension.
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Deferring the State Pension
Who can defer the State Pension?
A person can increase the starting amount of their State Pension through deferment as long as they are not on certain benefits. Details of these benefits can be found here. This includes people who are already claiming their State Pension, although this can only be done once (it is not normally possible if the person lives outside of the UK).
The increase they gain from deferring depends on when they reach State Pension age, and is subject to a minimum deferral period.
Individuals who reached State Pension age before 6 April 2016
People in this category can choose to receive higher weekly payments or a one-off lump sum:
- Higher weekly payments – their State Pension increases by 1% for every five weeks they defer (equivalent to 10.4% for every full year)
- Lump sum payment – the payment will include interest of 2% above the Bank of England base rate.
Individuals who reach State Pension age on or after 6 April 2016
People in this group can only take the higher amount as a weekly payment. Their State Pension increases by 1% for every nine weeks they defer (equivalent to 5.8% for every full year).
How long can you defer the State Pension for?
A person can delay taking their State Pension for as long as they wish, although there are minimum time periods for deferment as outlined below:
Individuals who reached State Pension age before 6 April 2016
- Higher weekly payments – the person must defer for a minimum of five weeks
- Lump sum payment – they must defer for at least 12 months in a row.
Individuals who reach State Pension age on or after 6 April 2016
- The person must defer taking their State Pension for a minimum of nine weeks.
How much might someone receive if they defer?
The increase in the amount of State Pension income can be calculated using the following formula:
Amount of increase = (1/number of weeks needed to defer) x (starting amount/100) x (number of weeks deferred for)
|
As an example: |
|
|---|---|
|
Number of weeks deferred |
52 |
|
Weekly state pension at date of claim |
£221.20 |
|
Number of weeks needed to defer for |
9 |
|
Amount of increase |
£12.78 (1/9 x £221.20/100 x 52) |
|
Total weekly pension after deferral |
£233.98 |
The extra amount is increased each year in line with prices (CPI). The triple lock arrangements that apply to the basic State Pension (BSP) and new State Pension (NSP) do not apply to the extra amounts earned by deferral.
Is tax paid on a deferred State Pension?
If someone decides to receive higher weekly payments, they will simply pay income tax on the total amount of income they receive from all sources.
If they decide to take the deferred pension as a lump sum, it will be taxed at their current rate of income tax. It will not be added to any other income received during that year, meaning they will not be pushed into a higher tax bracket as a result of taking the lump sum.
Is it worth deferring the State Pension?
There are many reasons why an individual may or may not choose to defer their State Pension. Whether they should or not will depend on their personal and financial circumstances. Essentially there are no direct costs when deferring the State Pension, but it does mean the person will not receive any State Pension income during the period of deferment.
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Important information
The content contained on this page is designed to give professional financial advisers technical information on retirement planning and pensions legislation and should not be relied upon.
This article represents a summary of our understanding of the law at the date of its last review (March 2024). Tax limits, benefits, allowances and rules are often subject to change and may change in future. Advisers and individuals should check that tax limits, allowances and rules have not changed. The value of benefits depends on individual circumstances. The minimum age you can normally access your pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless you have a lower protected pension age. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.
UKM0424/386544/SSO/0325
