Many people assume they must begin drawing their state pension from when they reach state retirement age, but by deferring, it may be possible to receive a larger amount when one eventually does take their state pension. While it will not be the right decision for everyone, it could be something worth considering for people looking to boost their retirement income.
Old state pension rules
People who retired under the old state pension, which is anyone who reached the state pension age before April 6, 2016, can pick up an extra £744.12 a year. These people enjoy flexibility in how they can receive their extra income when the time comes.
By delaying claiming one’s state pension for a minimum of 12 consecutive months, one can decide to receive a lump sum payment rather than a higher weekly income. This lump sum would include interest of 2 percent above Bank of England base rate and is taxable at the same rate as one’s other income.
When one comes to draw their deferred pension, retirees will be sent a letter and asked whether they would like to receive a lump sum or a higher weekly income. From the date of receiving the letter, they will then have three months to make their decision.
Pensioners can boost their income for every week they defer, as long as they do so for at least five weeks under the old state pension. The sum will subsequently increase by one percent for every five weeks one defers, which means by delating for a full year, pensioners would rack up a 10.4 percent increase.
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New state pension
Under the new state pension, which applies to people born on or after April 6 2016, the potential increase available is 5.8 percent for a full year. That would be worth an additional £10.42 a week for a year’s delay, or £541.67 for the year.
In order for one’s state pension to increase for every week it is delayed, one must defer for at least nine weeks. After those nine weeks, one’s state pension will rise by the equivalent of one percent, and will continue to do so for every nine weeks thereafter.
When the pension is claimed, the extra amount is included with the final sum a pensioner receives each week. There is no option to receive a lump sum with the new state pension.
This is unless one is receiving certain benefits before they reach state pension age, as in that case, one will have to tell the Pension Service that they want to defer. They will also need to do this if they have already begun receiving their state pension and now want to defer.
Deferring state pension is possible for anyone living in the UK, as well as the following countries: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Northern Ireland, Norway, Poland, Portugal, Republic of Ireland, Slovakia, Slovenia, Spain, Sweden or Switzerland.
However, it is worth noting that one cannot receive extra state pension if they get certain benefits, and deferring one’s pension can also impact the amount of benefits that they can receive.
One will not have to pay tax on their state pension during the time that they are not receiving it, and the tax one pays when they eventually do start receiving the state pension that has been deferred depends on how the money is paid. If one reached state pension age after 6 April 2016, they will receive their additional state pension in the form of an increased income, which will be taxable as earned income in the normal way.
However, those who reached state pension age before 6 April 2016 have a choice. If they decide to get their delayed state pension as an increased income, this will be taxable as earned income in the normal way. But if one chooses to have their extra state pension paid as a lump sum, this will be taxed at one’s current rate of Income Tax.