State Pension Strategies: When and Why Consider Deferring your State Pension
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Did you know that according to the Pension and Lifetime Savings Association, nearly half of UK adults approaching retirement don't fully understand how their State Pension works, including the benefits of deferring it? This lack of awareness can lead to missed opportunities for maximising retirement income.
One choice you might consider is whether to defer your State Pension to potentially boost your future income. In this blog post, we'll briefly summarise what the UK state pension is and outline how to qualify for the full new state pension. We then explore the advantages and disadvantages of deferring, helping to provide a clearer picture of how deferring your State Pension could impact your financial security and quality of life in retirement.
What is the UK State Pension?
The UK State Pension is a regular payment from the government that you can claim when you reach State Pension age, which is currently 66 but is set to rise to 67 between 2026 and 2028. The pension aims to provide financial support to individuals during their retirement years. There are two main types of State Pension:
1. The Basic State Pension: For those who reached State Pension age before April 6, 2016.
2. The New State Pension: For those who reached State Pension age on or after April 6, 2016.
This blog post focuses on the New State Pension only as the deferment rules differ from the old state pension.
Qualifying for the Full State Pension
To qualify for the full new State Pension, you need to have at least 35 qualifying years of National Insurance (NI) contributions or credits. If you have fewer than 35 years, you will receive a proportionate amount. You must have at least 10 qualifying years of NI contributions or credits to be eligible for the new State Pension.
Deferring Your State Pension
Deferring your State Pension means choosing to delay claiming it when you reach State Pension age. This can result in receiving a higher weekly amount when you do start to claim it. For every nine weeks you defer, your State Pension increases by 1%, which is equivalent to around 5.8% for a full year.
Advantages of Deferring State Pension
1. Increased Weekly Payments: Deferring can boost your State Pension payments. For example, if you defer for one year, your weekly State Pension will increase by about 5.8%.
2. Flexibility: It provides flexibility to those who have other sources of income and do not immediately need the State Pension
3. Potential Tax Efficiency: You may still have employment income which means that the payment of your state pension could push you into a higher rate of income tax. By deferring your state pension until after you retire, you may no longer be subject to paying the higher rate of income tax on your state pension income.
Disadvantages of Deferring State Pension
1. Health Risks: If your health deteriorates and you have a shorter life expectancy, you might not benefit from deferring.
2. Opportunity Cost: The money you could have claimed earlier could be invested or spent to enhance your quality of life.
3. Policy Changes: Future changes in pension rules might affect the benefits of deferring.
Making the Decision
Deciding whether to defer your State Pension is a personal choice and should be based on several factors:
1. Health and Life Expectancy: Consider your health and family history of longevity.
2. Financial Needs: Assess your financial situation and whether you need the pension income immediately.
3. Other Income Sources: If you have other retirement savings or income, deferring might be more feasible.
4. Personal Preferences: Your comfort with taking financial risks and preference for higher future income versus immediate cash flow.
Conclusion
Deferring your State Pension can be a beneficial strategy to increase your retirement income, especially if you are in good health and have other sources of income to rely on in the meantime. However, it's essential to weigh the advantages against the potential risks, particularly concerning your health and life expectancy. Everyone’s circumstances are unique, and making an informed decision requires careful consideration of personal health, financial needs, and future planning. Consulting with a suitably qualified financial advisor can also provide personalised advice tailored to your situation.