Many people in the UK are choosing to work past the normal retirement age because they have less to live on than they anticipated. Whether or not you continue to work, you can defer claiming your State and private pensions if you don't need the income immediately. You can choose to take extra income or a lump sum when you start claiming your State pension. Discuss your individual situation with a financial adviser as you'll need to take several factors into account before deciding if this is the best choice for you.
Extra State pension
If you defer your State pension for at least 5 weeks, you can opt to receive an increased pension when you start to claim. The increase is calculated at one percent for each week you defer, which is equivalent to 10.4 percent for each full year of deferment. Laith Khalaf, a pensions expert at Hargreaves Lansdown, believes this is a better alternative than deferring your private pension.
Lump sum payment
Deferring your State pension by a minimum of 12 consecutive months gives you the option of taking a lump sum payment of the amount deferred plus interest of two percent above bank base rate. Although the lump sum is taxable when you receive it, it won't affect your Income Tax rate or reduce your age-related tax-free allowance.
If you live outside the UK, you can defer your State pension in the same way as a UK resident, provided you haven't already started to claim it. When you start claiming your pension, your entitlement will include any yearly increases between your retirement age and the date you start to claim. This applies even if yearly increases aren't normally paid in your country. If you live in an European Economic Area or in a country with which the UK has an agreement, you will continue to get yearly increases.
If your private pension fund is smaller than you expected, your scheme may allow you to defer taking the pension to give the fund time to grow. Some schemes insist that you draw your pension by a certain age, or the plan may end automatically when you finish work. As well as a potentially larger fund, as an older purchaser you're likely to receive a better annuity rate than if you'd bought the annuity at retirement age.
Be aware that there can be disadvantages in deferring a State or personal pension. If you opt for the extra State pension, the additional tax may put you into a higher tax bracket. Another consideration is that you may not live long enough receive the missed income payments. If you defer £100 a week for one year, it will take you almost 10 years to receive the missed £5,200 of income. Your personal pension fund may lose value rather than gain it, or annuity rates may fall; either or both of these scenarios will leave you worse off than if you'd taken your pension earlier.
- NI Direct: State Pension deferral -- taking up your State pension later
- Gov.uk: Deferring your State pension
- The Observer: Reaping the rewards of deferring your state pension
- HM Revenue & Customs: Tax if you take your State pension later on
- NIDirect: Does living outside the UK affect State pension deferral?
- Monetos: Deferring your non-State pension
- JustRetirement: Deferring your retirement