What you need to know if you’re thinking about deferring your State Pension

The 1970 Stanford marshmallow experiment is one of the most well-known studies of the concept of “deferred gratification”.

In it, children were offered the choice of eating a marshmallow, or waiting 15 minutes and then being rewarded with another marshmallow for their patience. Theoretically, the children who were able to resist the treat for those 15 minutes supposedly had greater willpower and could see the benefit of waiting to get what they wanted so they could have something better.

While the study and its findings have subsequently been a subject of debate, it is a good example of how being patient and deferring gratification can be an effective strategy.

When it comes to financial planning, there are many ways that deferring gratification can lead to better results. Leaving your savings untouched, for example, can help you benefit from compound returns over time, or keeping your money invested over longer periods can offer a greater chance of generating a return.

Additionally, did you know that you can defer your State Pension payments? In doing so, you might be able to increase the payments you receive later down the line, while also making your wealth more tax-efficient.

However, as with any financial decision, there may be drawbacks to deferring that make it crucial to fully consider this choice first.

Read on to find out what’s involved in deferring your State Pension, and what you might want to think about before you do so.

Deferring your State Pension can see your payments rise

Provided that you have sufficient qualifying years on your National Insurance (NI) record, the State Pension can be a valuable part of your retirement income. You typically need 10 qualifying NI years to receive any State Pension, and 35 years to receive the full amount.

The full State Pension is worth up to £221.20 a week (just over £11,500 a year) in the 2024/25 tax year. This is a guaranteed source of income paid to you monthly that can provide the bedrock to your retirement.

Furthermore, thanks to the “triple lock”, the State Pension is designed to rise each year with the highest of year-on-year inflation, average wage increases, or a flat 2.5%. This helps to retain the spending power of the money you receive.

When you reach State Pension Age (66 in 2024/25, rising to 67 by 2028) you can start claiming the State Pension – contrary to popular belief, you have to claim it as payments don’t start automatically.

But crucially, you don’t have to start claiming at this point. Instead, you could choose to defer receiving what you’re entitled to, and in return receive higher monthly payments when you decide to claim.

As long as you defer for a minimum of nine weeks, then for every nine weeks you defer, your State Pension increases by the equivalent of 1%. Across 52 weeks, that works out to an increase of just under 5.8%.

That means, using the 2024/25 figure of £221.20 a week, you’d receive an additional £12.82 a week (around £660 a year) if you deferred for an entire year after your State Pension Age.

You’ll receive this amount as part of your monthly State Pension payments, and it will also increase each year in line with the triple lock.

You may want to defer if you plan to work past State Pension Age

The world of work has changed significantly over the past few years, and the State Pension Age is no longer the hard-and-fast point at which people retire. Indeed, many people continue working long past this age, even if that’s in a reduced capacity such as part-time or as a consultant.

So, if you plan to continue working beyond your State Pension Age and still have regular employed income, then you may want to defer your State Pension payments.

Not only could this provide a boost to your payments when you do decide to claim, but it could also help you make your wealth more tax-efficient.

The full State Pension is worth more than £11,500 a year in 2024/25, and counts towards your taxable income. Meanwhile, the Income Tax Personal Allowance – the threshold for income before tax is due – stands at £12,570 and is frozen here until 2028. That means the State Pension accounts for more than 90% of the Personal Allowance.

So, if you’re still in work when you reach your State Pension Age, having this additional income might simply serve to make more of your earnings subject to Income Tax.

If you’re a higher- or additional-rate taxpayer, this could see more of your income subject to 40% or 45% tax. Or, if you’re on the boundary of one of these higher tax bands, it could squeeze you into it so you end up paying a higher rate of tax for the first time.

As a result, deferring your State Pension could help you make your income more tax-efficient while you’re still working, while still allowing you to benefit from guaranteed payments at a higher rate in future.

It will take 20 years of State Pension payments to break even on deferring

While you can see the benefits of deferring your State Pension for the higher payments you can receive and the potential tax efficiency it affords, it’s worth noting that it will take some time to recoup the benefits you didn’t claim initially.

According to MoneySavingExpert, it would take around 20 years of receiving your State Pension after this to reach a breakeven point. That’s the case for deferring for any amount of time, so if you defer for three years, then you still won’t reach parity of what you would have earned for another two decades after you start claiming your pension.

As a result, there may be circumstances where deferring isn’t right for you. For example, if you’re in ill health, you may prefer to take your State Pension now so that you can make the most of it to achieve your goals.

Or, if you’d rather have some additional flexibility in case your plans change – such as if you stop working sooner than you had planned – then you may again want to claim what’s available to you as soon as you reach your State Pension Age.

It may be helpful to work with a professional, as they’ll be able to provide guidance on what’s the most suitable course of action for you.

Speak to us

At Britannic Place, we can help you assess whether it’s worth deferring your State Pension. If you’d like to work with a Chartered financial planner in Worcester, please get in touch with us by emailing info@britannicplace.co.uk or calling 01905 419890.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

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