The state pension is something which some people may look forward to getting from the moment they reach state pension age. For others, however, it may be that they instead decide to delay claiming the payment.
Speaking exclusively to Express.co.uk, Stephen Lowe, group communications director at retirement specialist Just Group, said: “Deferring receiving your state pension might sound a bit odd, most of us don’t even know we can do it.
“For some people it might be advantageous to do so, but you’re not guaranteed to benefit, there can be winners and losers.
“If you defer receiving your pension the government will give you a guaranteed increase in your state pension when you finally decide to claim it.
“This is to compensate you for not taking your pension as early as you could have done.
“But it can be complex so it’s important to work through your options before deciding to defer.”
Rules regarding the state pension changed back in 2016, and this means the deferrals system is different depending on whether a person reached state pension age before or after the change.
“The rules around deferring the state pension differ depending on when someone reaches the age when they are eligible to receive it – the key date to remember is April 6, 2016,” continued Mr Lowe.
“If you reached state pension age before April 6, 2016 you can usually take your extra state pension as either higher weekly payments or as a one-off lump sum.
“If you reach state pension age on or after April 6, 2016 you do not have the option of a one-off lump sum, instead your state pension will increase every week you defer, as long as you defer for at least nine weeks.
“If you are already in receipt of your state pension you may still be able to defer it – although this can only be done once.”
While not everyone may want to defer their state pension, it’s also important to note that not everyone is eligible to do so.
“If you are claiming certain benefits or receiving tax credits then you may not be able to defer,” Mr Lowe pointed out. “You can check which benefits by looking at the government website.”
Those considering deferring may want to think about the length of time they intend to do so, too.
“For anyone choosing to defer and receive a higher weekly state pension, they need to consider how many years it will take for those higher weekly payments to ‘pay back’ the amount of state pension income that has been given up while they have deferred,” said Mr Lowe.
“For people who reached state pension age before April 6, 2016 it takes around 10 years to ‘break even’ and for those who reach state pension age on or after April 6 2016 it will take around 17 years.
“So for people with a shorter life expectancy deferring may not be a good idea, so consider how long you think you will live and what other sources of income you can rely on until your state pension kicks in.”
Meanwhile, those who reached state pension age ahead of the 2016/17 financial year have other considerations to make.
“People who reached state pension age before 6 April 2016 and who have selected to receive the extra state pension as a lump sum have a different set of calculations to work through.
“The lump sum is calculated by adding up the entire amount deferred and adding to it compounded weekly interest at a rate of two percent per annum above the Bank of England base rate,” said Mr Lowe.
“The base rate has been low for some time (currently 0.1 percent) but the two percent interest is a guaranteed return – which may represent an attractive option for someone who does not immediately need their state pension.
“The lump sum is taxable at your marginal rate of income tax when you receive the lump sum.
“The good news is it isn’t treated as additional income – so claiming it won’t push you into a higher tax bracket.
“However, it may still pay to think carefully about when you take the lump sum. For example, if you plan to stop work or reduce your working hours in a new tax year that may mean your income moves down a tax bracket – so it may make sense to draw the lump sum in that year.
“People only pay income tax when their income exceeds their personal allowance.
“The personal allowance is currently £12,500.
“The basic income tax rate is 20 percent for taxable income from £12,501-£50,000 and the higher rate of 40 percent applies to income of £50,001-150,000.
“Taxable income over £150,000 is taxed at the additional rate of 45 percent. Delaying your state pension to a year when you are in [the] lower tax bracket could save you thousands of pounds in tax.”
Clearly, whether or not to defer is a decision which requires plenty of consideration.
Mr Lowe concluded: “Choosing how best to access pension money in order to have the right level of income that is sustainable for a lifetime is not easy and requires careful consideration and for people to think about the long-term.
“It means balancing the income foregone during the deferral period against the chance of higher income or a lump sum later, taking into account life expectancy and inflation.
“Our own research found that nearly half of 55-64 year-olds did not know that they have the option to defer their state pension, which highlights how important it is for people to seek guidance and advice before making important decisions on pensions.
“A good place to start is the free, impartial and independent pension guidance on offer from Pension Wise.”