As you approach retirement age, which is currently 62 for women and 65 for men, you need to consider whether you want to start drawing your state pension immediately. Although it isn’t possible to draw your pension before the retirement age, you are still able to delay it for later. This is called a deferred pension. The following guide will help you with pension planning and in deciding whether a deferred pension would be beneficial in your circumstances.

How to Defer Your Pension

As mentioned above, it is possible to consider drawing out your state pension after the official retirement age. This means that you won’t receive your state pension until at a further point when you decide to start drawing it.

The state pension rules have changed recently and this has changed how the deferred pension works. The different rules will apply to your state pension, whether you are retiring before or after 6 April 2016.

Your pension will automatically be deferred until you start claiming it by contacting the Pension Service.

Retiring Before 6 April 2016

If you hit the retirement age before 6 April 2016, your state pension will be applied with the current deferred pension rules. These mean that you need to put off claiming for at least five weeks, but you can continue delaying the payments for years if you wish to do so.

This means that every five weeks you defer, your pension will increase by 1%. In a year, this will mean a 10.4% increase. Under the current basic state pension rate:

  • You’ll receive £113.10 a week, which results to £5,881.20 a year
  • Deferring your pension for 12 months would increase your annual state pension to £6,492.84 and result in an annual increase of £612

In addition, you are currently able to draw your extra pension out as a lump sum once you start claiming it. This will be treated with an additional 2% interest, which makes deferring your pension for a year even more beneficial.

Retiring on or After 6 April 2016

The pension system is changing and you won’t receive the same benefits under the new rules. Although the basic state pension rate is going up, you won’t be able to benefit as much with deferral.

Although the official rates and minimum time to defer isn’t yet known, the rate will decrease and the time limit will increase. It is understood that you need to delay your state pension for a minimum of nine weeks in order to attract a 1% increase. This would result in an annual increase of 5.8%. Therefore, under the new proposal:

  • You’ll receive £148.40 a week, which results to £7,716.80 a year
  • Deferring your pension for 12 months would increase your annual state pension to £8,162.80 and result in an annual increase of £446

Under the new system, you won’t be able to draw out the deferred pension as a lump sum.

Pension Planning Tips

Whether or not you benefit from a deferred pension depends on a few essential things. First, when you are creating a pension plan, remember that you need to pay income tax on your extra pension.

In addition to this, your state pension might affect certain benefits. If you decide to defer, then the extra pension you’ll receive will affect your:

  • Pension credit
  • Housing benefit
  • Council tax reduction
  • Tax credits

On top of this, if you receive certain benefits, you won’t be able to claim extra pension during the time you claim them; these include income support and carer’s allowance.

Above all, you need to carefully consider your situation and whether you are able to continue working or have other means of income to support you while you defer your state pension.

It is always a good idea to discuss your situation with a financial adviser. 

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