Deferring 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).

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.

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)

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.

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.

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.