Deferring your state pension
If your contributions record is sufficient, you will be entitled to the state pension on reaching state pension age. The age at which you reach state pension age depends on when you were born.
To qualify for a full single tier state pension (set at £168.60 per week for 2019/20, rising to £175.70 per week for 2020/21), a person needs 35 qualifying years. A reduced pension is payable to someone who has at least 10 qualifying years, but less than 35. The single tier state pension is payable those reaching state pension age on or after 6 April 2016.
When you reach state pension age, you do not need to take your state pension immediately. You can instead choose to defer it, receiving a higher pension in return. The rules on deferred state pensions differ depending on whether state pension age was reached before 6 April 2016 or on or after that date.
The state pension is taxable.
State pension age reached on or after 6 April 2016
If you reach state pension age on or after 6 April 2016 and opt to defer your state pension, the amount that you receive when you start taking your pension will be increased, as long as you defer your pension by at least nine weeks.
The state pension is increased by 1% for every nine weeks by which the pension is deferred. Deferring the state pension for 52 weeks will increase it by just under 5.8%.
At the 2019/20 rate of £168.60 per week, deferring the state pension for 52 weeks will increase it by £9.74 per week. This will increase as the state pension increases.
Any deferred state pension is paid with the regular state pension and is taxable in the same way.
It is not possible to take a deferred pension as a lump sum where state pension age is reached on or after 6 April 2016.
State pension age reached before 6 April 2016
Different rules applied where state pension age was reached before 6 April 2016. Under the rules that applied at that time, the extra state pension could be used to increase the weekly pension payments or taken as a lump sum. Those reaching state pension age before 6 April 2016 receive, depending if the eligibility conditions are met, the basic state pension. This may be supplemented by the earnings-related second state pension.
The deferral rate was better under these rules too – the state pension was increased by 1% for every five weeks by which it was deferred. This is equivalent to an increase of 10.4% for every 52 weeks that the pension was deferred.
For 2019/20 the basic state pension was £129.20 per week. It will increase to £134.25 per week for 2020/21. At the 2019/20 rate, deferring the pension for 52 weeks increases it by £13.44 per week.
Under the pre-April 2016 rules applying to those who reached state pension age before 6 April 2016, it is possible to take the deferred pension as a lump sum if it has been deferred for at least 12 months in a row. Interest is also paid at 2% above the Bank of England base rate. This can be taken in the year in which the state pension is claimed or the following year.
A deferred pension lump sum is taxed at the taxpayer’s highest marginal rate on their other income when the lump sum is taken. So, if the taxpayer’s other income in that year is covered by the personal allowance, the deferred pension sum will be tax-free, but if the taxpayer has other income and is taxable at the basic rate, they deferred pension lump sum will be taxed at the basic rate, even if this takes the taxpayer’s total income into the higher rate band. It is taxed in the year in which it is taken
Deferring the state pension can be a useful way to increase your weekly pension if you do not need it immediately on reaching state pension age.
If you have any questions on this topic or are considering a change of Accountants, please give us a call as we would love to talk to you.