Delay for more Pay: Should I defer my State Pension?
As you near your State Pension age the thought of finally getting some reward from the government for the years of hard work starts to become an actual reality.
Something which for the majority of your life seemed so far away suddenly seems close. It’s exciting, and suddenly those years of National Insurance contributions don’t seem so bad. The common impulse is to start making the most of it straight away as, you’ve earned it and you deserve it.
There is however another option. You can also choose to defer your State Pension. You might be thinking ‘Why on earth would I want to delay receiving money that I’m entitled to?’. Well, the urge to choose this option lies in the promise of extra money, i.e. the government will increase your State Pension for every week you defer it. You delay, they pay.
So how does it work?
A State Pension will increase every week it’s deferred for at least 9 weeks. This increase amounts to 1% for every 9 weeks you defer or 5.8% per year.
For example:
The current full State pension works out as £179.60 per week and so by deferring for one year, you will receive an extra £10.42 per week. This means that a deferral of one year will mean that in your second year after State Pension age you would earn £10,128.07 instead of £9,339.20 or £541.84 extra (both grown at 2.5%).
So how do the two options compare?
Although the promise of extra money might seem like a good thing, it’s essential to consider the fact that in choosing to defer, you will miss out on the pension payments you would have been paid during the deferral period. I.e. In keeping with the above example of a one-year deferral, you would be missing out on the £9,339.20 that you are entitled to in your first year.
But how will you know if this is worth it in the long run?
Well, the way to do this is to work out how long it would take to earn the original amount lost in the first year through the extra money added due to the deferral. On top of this, we need to take into account the pension ‘triple lock’ of 2.5% inflation. The Magic number? 16 years. After 16 years the cumulative amount of the extra money from one year’s deferral on your State Pension will reach £9,959.14.
But is it worth it?
The answer is simple: Maybe.
On average, a man retiring at the State Pension age of 66 in 2021 would have a life expectancy of 85, whilst a woman would expect to reach 87 according to the Office of National Statistics.
This would mean that on average a man would have 4 years and a woman would have 6 years of receiving bonus income from the state pension. This isn’t for everyone and will depend on your specific circumstances, your health and whether you need the income straight away but this is certainly an attractive proposition for those that can afford to delay.