By delaying claiming your state pension you receive either an increased rate of state pension each week for the rest of your life, or if you delay for at least 12 months, a one-off lump sum based on the pension you have given up plus interest.
If you choose the increased rate of state pension you get 1% for every five weeks you delay claiming, which equates to a rate of 10.4% a year. The rate of increase to calculate the lump sum is 2% above the Bank of England's variable base rate.
Your own circumstances will influence whether deferral is worth considering and which option will suit you best.
If you are still working when you reach your state pension age any pension income you receive is taxable, so depending on the size of your earnings, this could push you into a higher tax bracket. Deferral could therefore have advantages if it is timed to avoid this.
An extra state pension is payable for the rest of your life. How long you delay and how long you then live for will dictate whether you’ll make a profit. For example, if you are entitled to a state pension of £100 a week, delaying claiming it for five years could earn you an extra weekly pension of £52 before tax. During the period you delayed, you would have given up £26,000 of state pension. You would therefore need to live about 9½ years before you showed a profit. From thereon however, deferral will have been to your advantage.
If you chose the lump sum instead (assuming an interest rate of 2.5% plus 2%) you would be entitled to £27,680. The lump sum is taxable but is charged at the same rate you are paying on your other income at the time of your claim. It won’t therefore push you into a higher tax band. You would also get your state pension at the normal rate when you claim it.
If you are claiming Pension Credit, the calculation of your entitlement takes into account any state pension you are delaying claiming. You will however still build up extra state pension in the normal way. But any extra state pension you eventually receive will be treated like any other income when calculating Pension Credit. However, if you choose a lump sum, it is ignored when your Pension Credit entitlement is calculated.
Deferring your state pension can also make a difference to benefits paid to your spouse or civil partner. Generally speaking they will be able to claim the amounts you never claimed if you were to die during deferment.
More information about deferral can be read at Pensions Advisory Service - deferring.
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