State Pension deferral – taking up your State Pension later
What is it?
What happens at the
What if I reached State Pension age before April 2005? What else do I need to know?
Tax and other considerations What is best for me? What do I have to do? This guide and the law
State Pension deferral simply 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.
Your State Pension age is set by law and is currently 60 for a woman and 65 for a man. The age at which you retire from employment does not affect when you can start drawing your State Pension.
State Pension age for women will begin to change from April 2010 so that by 2020, both men and women will have the same State Pension age of 65.
When you reach State Pension age you can:
- retire and claim your State Pension or
- claim your State Pension while you carry on working or
- put off claiming your State Pension for a while to get a bigger State Pension when you do claim, whether you carry on working or not
Since the State Pension was introduced, people have been able to earn extra State Pension by putting off claiming their State Pension, either when they reach State Pension age, or by deciding to stop claiming it for a while. You get this extra State Pension on top of your normal State Pension when you do eventually claim. It is paid for as long as you carry on claiming your State Pension and increases each year along with the rest of your State Pension.
- Currently, you can only build up extra State Pension for a maximum
of five years after you reach State Pension age.
- You earn 1% extra State Pension for every 7 weeks you put off claiming (this comes to approximately 7.5% extra State Pension
The Pensions Act 2004 includes measures which aim to help promote the option of older people extending their working lives by improving the reward for those who put off claiming their State Pension.
Now that people are living longer, healthier lives, it makes sense to make it easier to work flexibly after State Pension age. Changes are therefore being introduced from April 2005 so that people who want to continue working after they reach State Pension age have more incentive to do so.
From 6 April 2005, there will be more choice open to you but you do not have to be working to take advantage of the new choices – you just need to put off claiming your State Pension.
From 6 April 2005, if you put off claiming your State Pension, you can choose one of the following options when you do claim:
- Extra State Pension: You can earn extra State Pension worked
out at 1% for every five weeks you put off claiming (this is equivalent
to about 10.4% extra for every year you delay claiming compared to about
7.5% extra before 6 April 2005).
You must put off claiming your State Pension for at least five weeks to get extra State Pension.
Example – extra weekly pension
Anne decides to put off claiming her State Pension for 5 years.
When she comes to take up her pension, the weekly rate she would have been entitled to, if she had not put off claiming, would have been £105.
As she put off claiming for five years and chose extra State Pension, the amount of State Pension she will get every week will be £159.60.
- A lump sum payment: A one-off lump sum payment based on the
amount of normal weekly State Pension you would have received, plus
interest added each week and compounded. You also get your State Pension
when you claim it paid at the normal rate.
You have to put off claiming your State Pension for at least 12 consecutive months, which must all fall after 5 April 2005, to have the choice of a lump sum payment.
The compounded rate will be broadly equivalent to an annual interest rate of 2% above the Bank of England’s base rate (so if the base rate was 4.75%, the annual rate of return would be 6.75%). As the Bank of England base rate may change from time to time, the rate of interest used to calculate the lump sum could also change.
Example – lump sum (based on illustrative rate of return of 6.75%)
Ahmed’s weekly State Pension is worth £105.
When he reaches State Pension age he decides to put off claiming his State Pension for five years.
When he claims his pension, if he chooses a lump sum, he will get a lump sum of around £32,306 (before tax) as well as his normal weekly State Pension entitlement.
The maximum time limit of 5 years that you can put off claiming your State Pension to earn extra State Pension has been removed. This means that from April 2005, you can put off claiming your State Pension for as long as you want and be able to earn extra State Pension, or a lump sum.
You will still be able to take advantage of the new rules if you wish. If you have claimed your State Pension from State Pension age, you can later choose to cancel your claim to build up entitlement to extra State Pension or a lump sum payment (but you should note you will only be able to cancel your claim in this way once and only if you are normally resident in the UK, as now).
If you have not claimed your State Pension, when you finally do claim it, you will get an increase based on the current rate of extra State Pension for the period up to 6 April 2005 (1% for every 7 weeks’ delay, or approximately 7.5% for a whole year). For the period falling after that date, you will be eligible either for an increase based on the new extra State Pension rate (1% for every 5 weeks’ delay or approximately 10.4% for a whole year) or, if you continue to put off claiming for a further 12 months, a lump sum payment.
You’ll have to put off claiming your pension for at least 12 months to qualify for the lump sum payment. If you put off claiming your pension for less than a year, you can still get extra State Pension. Or, you could choose to have arrears of pension paid back to you in one payment (without any extra interest). This is known as 'backdating'.
Currently, we can backdate your State Pension for up to three months. Between 6 July 2005 and 6 April 2006, the maximum period we can backdate your claim will be gradually extended from three months to 12 months (these changes still have to be agreed by Parliament). If you decide to backdate your claim for State Pension, it will reduce the amount of extra State Pension or lump sum payment you could get.
If you are getting certain other benefits at the same time as you are putting off claiming your State Pension, the days you are getting these other benefits will not count towards any extra State Pension or lump sum payment. These benefits are:
- Carer’s Allowance, Incapacity Benefit, Severe Disablement Allowance,
Widow’s Pension, Widowed Mother’s Allowance, Unemployability
Supplement or any type of State Pension or
- an increase in any of these benefits paid to someone else for you – this does not apply if you are not living with the person getting the increase, but not if they are your husband or wife
Also, you will not build up extra State Pension or a lump sum payment for any days that you would not have been allowed to get a State Pension even if you had been claiming it – for example, if you were in prison.
If you should die after putting off claiming your State Pension, your widow or widower may be entitled to extra State Pension or a lump sum payment for the period you had put off claiming.
If you die while you are still putting off your State Pension claim, and you have put off your claim for at least 12 months, your widow or widower will be able to choose between extra State Pension and a lump sum when they claim their own State Pension. If you had already claimed your State Pension and chosen extra State Pension before you died, your widow or widower will get extra State Pension added to their own State Pension, or, if you had chosen a lump sum, any amount you still have left will form part of your estate in the normal way.
The amount of extra State Pension or lump sum payment payable to a widow or widower will be the same as the person putting off their pension would have received except that the amount based on the additional (earnings-related) part of the State Pension will be reduced in line with other State Pension rules on inherited additional State Pension.
If you are widowed while you are still under State Pension age, you will not be able to get extra State Pension or a lump sum payment for your late husband if you remarry before you reach State Pension age (this is currently 60 for a woman).
Rules that apply to widowers until April 2010 mean that a man will not be entitled to extra State Pension or a lump sum payment from his late wife unless he himself is also over State Pension age at the date of her death.
How is extra State Pension treated for Pension Credit, Housing
Benefit and Council Tax Benefit?
Extra State Pension will continue to be treated in the same way as any other retirement income in Pension Credit, Housing Benefit and Council Tax Benefit as it is now. And it may, of course, earn additional savings credit in Pension Credit where your income exceeds the savings threshold which is currently set at the level of the basic State Pension.
How is the lump sum payment treated for Pension Credit, Housing
Benefit and Council Tax Benefit?
Normally, if you claim Pension Credit, Housing Benefit or Council Tax Benefit, any savings you have above certain limits will affect the amount you get. However, lump sum payments will be disregarded in calculating these benefits so that if you choose a lump sum payment, you will not get less Pension Credit, Housing Benefit or Council Tax Benefit because of the lump sum payment.
If you are claiming Pension Credit while you are putting off claiming your State Pension, Pension Credit will be calculated at that time as if you were getting your State Pension.
How are extra State Pension and the lump sum payment treated
Note: the tax rules for the lump sum are proposals at this stage and must be approved by Parliament before they can become law.
State Pension is counted as income for tax purposes and the extra State Pension is taxable in the same way as your normal State Pension. The lump sum payment is also taxable and will be taxed at the rate that applies to your other income. This will help to ensure that the lump sum payment will not push you into a higher tax bracket. If tax is due, it will be deducted from the lump sum payment before it is paid to you.
You will have the choice of taking the lump sum payment either at the point your State Pension is claimed or in the following tax year. This is likely to be beneficial if your income falls after you have claimed State Pension, for example because you are no longer working. However, the tax effects will depend on your particular circumstances. You should contact your tax office if you have specific enquiries about tax matters.
Your first decision is whether to claim your State Pension as soon as you reach State Pension age or whether to put off claiming it for a while. If you decide to put off claiming your State Pension, you then need to choose which option will suit you best. You will not need to tell us your choice until you finally claim your State Pension.
The key difference between the two choices you will have if you put off claiming your pension is that extra State Pension will give you a higher weekly State Pension for life from when you do claim it, whereas the lump sum payment is a one-off payment and you will get your normal State Pension once you do claim it.
The choice is yours and will depend on your circumstances and wishes.
The information on this web page is intended to provide only a summary of the changes from 6 April 2005. Putting off your State Pension may not be right for everyone. If you wish to consider doing so it is important to find out more before you decide. To help you decide, we have produced a detailed guide about putting off claiming your State Pension.
You can also obtain this guide by calling 0845 31 32 33 and quoting SPD 1.
Whatever you decide to do, when you put off claiming your State Pension, you need to think carefully about your options. It is also a good idea to discuss it with your friends and family, with an independent financial adviser or with organisations which represent pensioners. (If you are thinking about getting independent financial advice, don’t forget that you may have to pay for this).
If you have not yet claimed your State Pension but you want to put off taking it up, you do not need to tell us. If you are already getting your State Pension, but you would like to stop claiming it to earn extra State Pension or a lump sum, you should contact your pension centre (the telephone number will be on any letters you have received from your pension centre).
The information on this web page is only a guide. It has no status in law. It does not cover all the rules for every situation, nor does it provide a full interpretation of the rules. It should not be treated as a complete and authoritative statement of the law.