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Deferring (delaying) state pension: what is it and how to calculate


You hear a lot about state pensions, and how it’s more convenient for you to defer it instead of collecting it once you become eligible – but what does deferred pension mean and why is it more convenient? 

In the UK, the state does not automatically start sending you payments from the pension of money that it sets aside for you – you need to claim it! Once you are nearing the age for state pension eligibility, you’ll receive notification in the post with instructions on how to claim it. 

To defer your state pension, you don’t need to do a thing! Your pension will automatically be deferred until you decide to claim it. For most people, it makes more sense financially for you to defer your state pension, but keep in mind that extra payments that you receive from deferring could be taxed depending on the amount of income you receive from other sources!

Deferring (delaying) state pension: what is it and how to calculate: Summary table

❓What is deferred pension?Deferred pension refers to the act of delaying the collection of state pension payments until needed once someone has reached retirement age.
🤔 What do I need to do to defer my state pension?To delay when you start receiving your state pension payments, there are no specific actions you need to take – all you need to do is wait to lay claim to your state pension until you are ready to start receiving it.
💳 How can I receive my deferred pension payments?For most people, additional income accrued from deferring pension payments are paid together with normal pension income

What is deferred pension?

Simply put, deferred pension is just putting off collecting your state pension payments until you actually need to start collecting it. But why does it make more sense financially to defer your state pension payments? The reason why is because, for every week you defer your claim, your state pension accrues interest, resulting in a higher weekly state pension payment once you do decide to claim it. 

Can I delay my state pension?

You have the option to delay receiving your pension payments for as long as you want, but in doing so you must delay not only your basic state pension as well as any other state pension you’ve built up for yourself over the years. However, there are some limitations to the deferred state pension scheme. 

Deferring pension if you are on benefits

If you are already receiving certain state benefits, you may not be able to accrue interest on your state pension, and choosing to defer your state pension may also impact the amount of benefits that you receive. If you are on benefits and you want to defer your state pension, you will have to specify this to the Pension Service.

What you need to do to defer your State Pension

To delay when you start receiving your state pension payments, there are no specific actions you need to take – all you need to do is wait to lay claim to your state pension until you are ready to start receiving it. It will automatically defer once you become eligible to claim it but wait to do so.

Calculate deferred state pension

The amount you receive in State Pension is based on how much you’ve contributed to National Insurance, but the interest rate that you can accrue on your state pension depends on when you become eligible to claim it – before or after the end of the fiscal year end April 6 2016.

You can use the deferred pension calculator to estimate how much your state pension payment will be if you defer by using the programme available on the www.gov.uk website.

Reached State Pension age before 6 April 2016

For people who have reached the age in which they become eligible for state pension (between 66 and 68 years old depending on the year you were born) before April 6, 2016, your  state pension will increase by 1% every 5 weeks that the pension isn’t claimed. Over the course of months, this can certainly add up! 

As long as you have waited at least 5 weeks to claim your state pension, you have the option to receive the additional state pension accrued from deferring as either higher regular payments or a lump sum payment (this option is only available to those that have reached eligibility before April 6 2016). Once you claim your deferred state pension, you will receive a letter in the post asking how you want to receive this extra pension, and you will have three months from receipt of the letter to decide your response. If you opt for weekly payments, the additional amount accrued will be added to your regular state pension payment.

Deferred Pension payments: extra income or lump sum?

If you fall under this first eligibility category, reaching state pension eligibility before April 6 2016, you can choose whether to increase the amount of money that you receive in your regular pension payments or to receive a deferred pension lump sum, though this is only an option for those who have deferred their state pensions for at least a year.

Reaching State Pension age on or after 6 April 2016

For people who have reached the age in which they become eligible for state pension on or after April 6, 2016, your  state pension will increase by 1% every 9 weeks that the pension isn’t claimed. The additional pension accrued will be paid directly into the regular pension payments you will receive.

Can I take my deferred pension at 55?

If you are lucky enough to have figured out how to retire at 55, you will need to rely on your own personal pension pot and other sources of income for a while, since you are only eligible to claim your state pension once you are at least 66 years old, it isn’t possible to claim or defer your pension before you are eligible. The age you become eligible continues to change, so you should check the state website to determine when you are able to claim or defer your state pension.

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How to Claim deferred state pension

Once you first become eligible to claim your state pension, you will receive a letter explaining how to claim your state pension. If you decide to defer the claim, you don’t need to do anything, but what is the process for claiming deferred state pension?

Once you are ready, the easiest way for you to start the process for claiming your deferred state pension is by applying online on the state’s website. Otherwise, you can call the Pension Service during business hours from Monday to Friday and make your claim with a representative.

Deferring State Pension if you move abroad

If you have moved abroad to another country in Europe, or a country that the UK has a social security agreement with, the rules for deferring your state pension are the same. Note that your state pension is based on your UK National Insurance contributions, and you need to have made at least ten years worth of contributions to be eligible for state pension. So if you have moved abroad and have not made at least 10 years worth of contributions, you cannot claim state pension.

Inheriting a deferred State Pension

It’s possible to inherit deferred state pension from a deceased partner if you meet the following criteria:

  • your partner reached state pension eligibility before Aprile 6, 2016
  • you were legally married or in a civil partnership with your partner when they died
  • your partner had deferred state pension, or was receiving deferred state pension when they died
  • you have not remarried or formed a new civil partnership before reaching state pension eligibility

In addition, if your partner died before April 6, 2010, you must also meet at least one of the following criteria:

  • you had reached state pension eligibility when your partner died
  • you had not reached state pension eligibility when your partner died, but you are a woman and your deceased partner was your husband

Do I pay tax on deferred Pension?

You may need to pay taxes on additional pension income that you receive if you exceed your annual Personal Allowance. If the amount you receive in income from your state pension (including additional pension payments from deferred pension claims), private pensions or company pensions, taxable benefits, or any other income such as employment wages, properties or investments is more than £12,570. If you have multiple private or company pensions, you may want to consider a pension transfer to keep everything in one place, so it’s easier to keep track of. You will also have to pay tax charge on pension payments if the total worth of your state and private pensions exceeds your pension lifetime allowance, £1,073,100.

Is it worth it to defer pension?

Are deferred pension benefits worth delaying the claim? Deferring state pension has its financial advantages, however it may not be a good option for everyone, such as people who have not planned other sources of income after retirement. It makes more sense for those who also have company pensions or sources of income during retirement, since you would essentially be giving up more than £7,000 of income each year that you defer. 

You should also keep in mind your health and lifestyle when deferring your state pension. If you are strong and healthy, you will be able to claim much more money in your pension when you are older. 

The key to successful retirement planning is to understand what your options are and set goals for yourself. Moneyfarm’s team of experts and pension guide are both great tools to help you plan for your retirement, so that once you’re there, things go smoothly!

FAQ

Why does it make sense financially to defer pension?

For every week you defer your claim, your state pension accrues interest, resulting in a higher weekly state pension payment once you do decide to claim it.

How can I calculate my deferred state pension benefits?

The amount you receive in Pension benefits is based on how much you’ve contributed to National Insurance, and the interest rate you accrue on deferred pension benefits depends on when you become eligible to claim it, and equates to a 1% every 5/9 weeks deferred.

When can I begin taking state pension?

Depending on when you were born, you can begin receiving State Pension benefits once you turn 66 years old.

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