TPAS - The Pensions Advisory Service

Deferral

When you reach your state pension age you do not have to claim your state pension straight away, you can choose to defer claiming your state pension. In return, when you do decide to draw your state pension, as long as you have put off claiming for at least 5 weeks, you will receive an increased state pension at a rate higher than would have applied at your state pension date. Alternatively, if you have given up your state pension for at least 12 months, you can choose to receive a cash sum.

By deferring your state pension, your pension is increased at a rate of 1% for every 5 weeks you put off delaying drawing it. This equates to 10.4% extra a year. You also have the choice of a cash sum, as long as you delay drawing your pension for 12 consecutive months. The lump sum will equal the amount of pension you would have received plus interest. The rate of interest used equates to 2% above the Bank of England base rate.

For example, if your state pension was £105 a week and you decided to delay drawing it for 5 years, if you chose to receive an increased state pension, the pension you would then receive would be £159.60 a week.

If you decided to take a cash sum instead, assuming the base rate was 4.5% and therefore the rate of interest used would be 6.5%, the lump sum would be about £32,000 (before tax). The state pension would then be paid at its normal rate.

A Category B pension (sometimes referred to as the married person's pension) is paid by virtue of a spouse’s or civil partner's qualifying years and earnings.  Currently, on reaching their SPA, a person cannot claim a Category B pension until their spouse has claimed their own pension.

This restriction will be removed with effect from 6 April 2010.  As a result, where one member of a married couple or civil partnership has deferred his or her pension and the other member has reached pension age, the other member will be able to claim their Category B pension.

Q & As

What is State Pension deferral?

This means that you do not have to take your pension at State Pension Age, instead you can out off receiving it to a later date, this is called State Pension deferral.

What if I have already started to draw my pension?

You can still take advantage of the deferral options by electing to give up your pension for a period. To do so, you should contact your local Pension Centre. However, you can only give up your state pension once and should normally be resident in Great Britain. If you are not resident in Great Britain, you would normally only be permitted to give up your state pension to earn an increased state pension or lump sum, if you are living in one of the following countries:

Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Northern Ireland, Norway, Poland, Portugal, Republic of Ireland, Slovakia, Slovenia, Spain, Sweden and Switzerland.

What if I am receiving Pension Credit?

Even though you may have put off drawing your state pension, your Pension Credit entitlement will be calculated as if you were getting your state pension.

For how long can I defer my state pension?

There is no limit. You can put off drawing your state pension for as long as you like.

Which is the better option, increased pension or cash?

You will need to decide which option best suits your circumstances. To help you decide, you'll need to take account of the main differences: -

If you opt for an increased state pension, it is payable for the rest of your life. If you elect to take the cash sum, it is a one-off payment and your weekly pension is then paid at the normal rate.

Any increased state pension you receive will be treated like any other income for the purposes of calculating the Pension Credit. However, if you elect a cash sum, it is ignored for Pension Credit, Housing Benefit or Council Tax Benefit.

An increased state pension is subject to income tax in the normal way. The cash sum is also subject to tax but you will not pay a higher rate on the cash sum than you will pay on other income you receive in the tax year the cash sum is paid.

Will taking the cash sum put me into a higher tax bracket?

No. It will be taxed at the rate that applies to your other income.

What if I die during the period my pension is deferred?

If you are married and have claimed your state pension, you may be entitled to extra state pension. If your spouse had deferred their state pension for at least a year, you will have the choice of either the extra state pension or a lump sum.

If you die after drawing your state pension, it will depend on the choice you made. If you chose an increased pension, your spouse will be entitled to an increase to their state pension. If you chose cash and this had been paid, it will form part of the your assets in the normal way. If the cash sum had not yet been paid, it is payable to your estate.

I started to defer my pension before April 2005, how does it affect me?

Any increases for periods before April 2005 are still calculated using the pre 6 April 2005 rates of increase (1% extra for every 7 weeks). The more generous rates applicable after 6 April 2005 apply for any period of deferment from 6 April 2005. However, if you wish to take the cash sum option, it is necessary to give up your state pension for at least 12 months after 6 April 2005.

Will I still get the Winter Fuel Payment?

Yes. Payment of the Winter Fuel Payment is dependent on you being 60 and living in the United Kingdom.

When do I need to choose between an increased state pension and cash?

As long as you given up your state pension for 12 months you will have a choice.

Can I change my mind?

Yes, as long as you do so within 3 months of making your original choice. If you do change your mind, any extra state pension or lump sum will need to be repaid. You can only change your mind once.

Can I choose a combination of increased state pension and cash?

No. You have to choose either an increased state pension or a lump sum payment.

What if I choose to backdate my pension?

If choose to backdate your pension, the length of time you have put off drawing your state pension will reduce. Consequently, any increased state pension or lump sum due will need to be reduced accordingly. For example, if you put off drawing your state pension for 16 months, but elect to backdate for 2 months, for the purposes of calculating your increased state pension or lump sum, the calculation will be based on 14 months.