Any offer of high headline growth, especially where ‘guarantees’ are mentioned should be treated with the utmost scepticism, however if you defer your state pension for over 5 weeks, you will receive a 1% uplift to your pension benefits; this equates to a 10.4% increase per year.
For example, if an individual had deferred their State Pension for two years from when their entitlement was £110 a week, they would expect 2 years of the April increases. If we assume this meant their entitlement two years later was £120 a week, then on claiming they would receive their regular pension of £120 a week plus an Extra State Pension amount of £24.96 per week (i.e. 20.8% of £120). This gives a total state pension, after 2 years of deferment, of £144.96 per week.
As an alternative, they could elect to have the deferred amount as a taxable lump sum, as long as the pension had been deferred by at least one year.
Therefore if it is affordable, deferring a state pension can be beneficial.
However, there are disadvantages:
- Firstly, if the pensioner dies before drawing their pension the deferred lump sum would be available, but any additional income benefit is likely to be lost (in some cases an eligible dependent may be able to claim an additional increase to their pension)
- Secondly, we do not know how future changes to legislation may affect this benefit, we do know that a flat rate £140pw is proposed in 2014, but not what transitional arrangements will be for those with greater pension entitlements
- Finally, if you opt for the increases to your pension (which is often more beneficial) you need to live a minimum period to effectively recoup the pension income you’ve refused in earlier years. Those with a normal life expectancy will benefit from deferral, but those who are in poor health, and those who die unexpectedly early may be better off not deferring their state pension
Deferring a state pension can be especially beneficial for those who are paying higher or additional rates of tax, who believe they will be paying a lower rate in retirement. It’s also interesting to note that you can defer a state pension you’re presently drawing, as long as you are in the UK, or one of a limited (broadly EU) number of countries.
More detail on deferral can be obtained on the Department of Work and Pensions website.