Most of us will claim our State Pension as soon as we can. With the age of entitlement rising to 66 for men and women, we’ll have waited long enough.
However, there are benefits to waiting. Defer for 12 months and you will get more than £500 extra when you finally do claim. State Pension deferral won’t be right for everybody, but it will make financial sense for some.
Patience is a virtue
If, like a growing number of Britons, you plan to work to 66 and beyond, you could be making a costly financial mistake by drawing your State Pension the moment you are eligible, as you could hand over more money to the taxman.
As many as 500,000 older workers have fallen into this trap because they didn’t realise they could defer their State Pension, according to new research from Royal London.
The deferral option is open both to those who haven’t yet drawn into it and those who have, as they can ‘un-retire’ for a while and, again, get more when they start claiming again.
Time to defer
The single tier pension for those who retire this year is £168.60 a week, or £8,767.20 a year. This is well below the new tax-free personal allowance of £12,500, so it shouldn’t attract income tax on its own. However, if you work as well, your total income could quickly rise above that threshold, so you do pay tax.
By delaying taking your State Pension until you have stopped working, or reduced your hours, you may pay less tax when you do finally take it. The state gives you an incentive to delay by topping up your pension by 5.8% for each year you wait. You can defer for a minimum of nine weeks, which gives you 1% more.
If you delay taking your pension for one year today, you get an extra £508.50 every single year for the rest of your life (and rises in line with CPI too). The catch is that you will need to live another 17 years to make good the £8,767.20 you have sacrificed. If you die after a few years, you will have lost out financially.
So if you are in good health and likely to live longer, the arguments in favour of deferral are stronger. Also, if you’re still working and paying income tax at 40% or 45%, deferral can make sense if you have no other form of pension and have to carry on working, as you’ll get more state support when you eventually stop.
Alternatively, you could take the State Pension as soon as you can, and invest any surplus income in a tax-free ISA, or back into a pension, claiming tax relief when you do.
You can also give yourself much more room to manoeuvre by building your own personal nest egg either in a tax-free ISA or flexible self-invested personal pension plan.
Millions of Britons now rely solely on the State Pension and have to take it as soon as it’s available. By saving and planning ahead, you can give yourself the freedom to take it at a time that suits you.
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