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The age from which you can start accessing your state pension depends largely on your age, but in 2021 this is set at 66 for both men and women (expected to rise to 67 between 2026 and 2028). However, you are not required to start claiming your state pension at the point when you qualify to receive it. It is possible to defer your state pension, if you want to.
In this article, our financial planning team at Elmfield here in Padiham, Burnley explores some of the reasons why an individual might defer his/her state pension. We offer various pros and cons to doing so and suggest some considerations to discuss with your financial planner. We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
Why the state pension matters
For most retired people in 2021, the state pension forms a crucial part of their income once they finish their careers. Around 33% rely on it almost entirely to meet their living expenses – making up £3 out of every £4 spent by the poorest pensioners. Even for wealthier people, it forms a key part of a typical retirement plan. In 2021-22, the full new state pension offers up to £9.339.20 per year. Given that at least £12,000 is usually needed for a single person to meet essential living costs in retirement (assuming the mortgage is paid off and you own your home), the state pension could contribute towards covering over 50% of a retired person’s expenses. This helps to show why it is so vital to try and get the best state pension deal – even considering deferring your state pension, in certain cases.
Delaying a state pension
To get your full state pension entitlement, you need at least 35 “qualifying years” of national insurance contributions (NICs) on your record. You cannot start accessing your state pension benefits before your state pension age, but can delay receiving the whole thing if you want – even if you have started taking an income from it.
For some people, taking their state pension at their state pension age would mean doing so without a full 35 years’ worth of NICs. For instance, you may have 25 years under your belt (a 10 year shortfall), leading to a lower state pension income that you might otherwise have had.
Here, you have a few different options:
- Continue as you are, assuming you are at peace with the income you will get in the years of retirement ahead.
- Make voluntary NICs to complete previous years where your NICs were insufficient to make it a “qualifying year”. In some cases, this might involve a small one-off payment to HMRC and could make a big difference to your retirement income.
- Defer your state pension, allowing you to build up a larger state pension income.
How to defer a state pension
Perhaps making voluntary NICs is not suitable for you after discussing the matter with your financial adviser. How, exactly, does deferring your state pension work? The system operates differently depending on whether you reached state pension age before or after the 6th April 2016. If before this date, you get a 1% state pension increase for every 5 weeks you defer – leading to 10.4% over a full year. After this date, however, the yearly increase falls to 5.8%.
Clearly, deferring will be more attractive for people in the former group and partly reflects the fact that the new state pension is higher than the basic state pension. Those who qualify for the state pension before the 6th April 2016 can also receive it as a lump sum, if he/she defers it for a year. However, it can still be a good option for people receiving the new state pension in some situations – particularly if you have retirement income from other sources to support you in the meantime (e.g. a workplace pension scheme).
For instance, if you move abroad then you likely will not be able to claim the UK’s annual increase to the state pension. This can make deferring more attractive and give you more income in the long term if you live a long time (although you would be giving up income in the short term – e.g. for a year). The rules for deferring your state pension are the same as here in the UK for those living in – or looking to move to – the EEA (European Economic Area) or countries which have a social security agreement with the UK.
In 2021, the number of people deferring their state pension has fallen significantly since 1999. This may partly be due to the impact of COVID-19 on pension pots, which likely has caused people to rely more on their state pension income (which is not impacted by stock market falls). However, it can still be a good option for many people who want to increase their retirement income over the long term.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938