Frequently Asked Questions
What are the pros and cons of
State Pension deferral?
“State Pension deferral means putting off claiming your State Pension, when you reach State Pension age, or choosing to stop claiming it after having claimed it for a period.
From 6 April 2005, if you choose to put off claiming it for a while, you may be able to get a higher State Pension, or the choice of a one-off taxable lump sum payment when you do finally claim.
To get extra State Pension you have to put off claiming for at least five weeks and there's no maximum time limit on how long you can put off claiming your State Pension or the lump-sum payment.
You build up extra State Pension at 1% of your normal weekly rate for every five weeks you put off claiming (this is equivalent to about 10.4% extra for every full year you put off claiming). The amount of extra State Pension you receive when you claim is calculated by adding up all the extra State Pension accrued. It is not compounded and should not be seen as interest.
Extra State Pension is paid on top of your normal weekly State Pension from when you start claiming it, and continues for as long as you are getting State Pension. The extra pension is increased each April in line with increases to your State Pension.
Example 1 –
Anne decides to put off claiming her weekly State Pension of £90. When she finally claims her State Pension after two years, she chooses extra State Pension. This will give her a total weekly State Pension of £108.72 for life. (In this illustrative example, the extra State Pension of £18.72 is based on £90 per week State Pension for the whole period. In a real example, the amount will be more if the State Pension rate goes up during this time).
Comment: In this example, whilst you benefit from extra pension of £18.72 per week (£973.44 pa) after 2 years, deferral has meant that you have lost out on the first 2 years worth of pension at the lower rate (£9,360 gross exc inflation). To make this up, you would therefore need to survive for about 10 years to break even.
To get a lump-sum payment you have to put off claiming for a continuous period of at least 12 months (which cannot include any period before 6 April 2005).
The lump sum is a one-off, taxable payment based on the amount of normal weekly State Pension you would have received, plus interest. You also get your State Pension paid at the normal rate from when you start claiming it.
The interest rate will always be 2% above the Bank of England's base rate (so if the base rate was 4.5%, the rate of interest would be 6.5%). As the Bank of England base rate may change from time to time, the rate of interest used to calculate the lump sum can also change.
Example 2 –
Bob decides to put off claiming his weekly State Pension of £105 for three years. When he finally claims his State Pension, if he chooses a lump sum, he will get a lump sum of around £18,000 (before tax) as well as his normal weekly State Pension entitlement. (In this illustrative example, the lump sum is based on £105 State Pension and interest of 6.5% for the whole period. In a real example, the amount will take account of changes in both the weekly State Pension and the interest rate.)
comment: The return payable here is reasonable at 2% above base and you still enjoy the full amount payable so life expectancy has less bearing.