Deferring the state pension

What is State Pension deferral?

Deferral means choosing to delay claiming at State Pension Age (SPA) so that the eventual weekly amount is higher. If an individual does nothing at SPA, the pension is automatically deferred until they actively claim it.

How does deferring the State Pension work?

For individuals reaching state pension age on or after 6 April 2016: 

• For every 9 weeks of deferral, the pension accrues 1% extra for a full year. This works out at just under 5.8% for every 52 weeks.
• The extra is added to the weekly rate when the individual eventually claims (claiming it as a lump sum is not an option) and it’s taxable alongside other income.

As the state pension is taxable income, people who continue working beyond state pension age should carefully consider whether claiming it immediately is the best option. To illustrate this point, let’s consider two scenarios.

Case study A: individual who will have no other income in retirement except state pension

An individual who is currently in full-time work and works for one year past state pension age.

• They currently earn £25,500 a year.
• The tax-free personal allowance is £12,570 in 2026/27.
• The full flat rate state pension is £12,547.60 a year in 2026/27.

This individual is still working at age 66 and is considering the following two options:

• To draw their state pension immediately at their state pension age of 66, or
• To defer taking their state pension until they stop work in a year’s time.

In the first option, the state pension is added to their earnings when income tax is calculated. Since their earnings exceed the annual tax-free personal allowance, the whole of the state pension will be subject to income tax at 20% (if in England, Wales or Northern Ireland).

In the second option, a higher rate of state pension is payable (because they deferred by a year) and no tax is paid because the individual has no other taxable income once they stop working.

The impact on their total retirement will depend on how long they live, and on average, this will be longer for women than for men.

The next two boxes show the outcome for a male and for a female with average life expectancy at 66. (To reduce complexity, we have ignored future indexation of the state pension and of the increment to the state pension for deferral).

Example for a male 

Scenario A1. Male, takes state pension immediately and lives for another 19 years

Scenario A2. Male, defers state pension one year and lives for another 18 years

Gain from deferral over their lifetime £3,009.67

^AThe enhancement is 1% for every 9 weeks it is deferred. 52/9 = 5.777

Example for a female

Scenario A3. Female, takes state pension immediately and lives for another 21 years

Scenario A4. Female, defers state pension one year and lives for further 20 years

Gain from deferral over their lifetime £4,459.42

In both cases the increase is over £3,000. By deferring their state pension until they stop working, they both have a tax saving of £2,509.52 because the state pension is never subject to income tax (it is not drawn until there is no other taxable income and it falls beneath the personal allowance). However, the female gained more than the male because she has an extra couple of years during which the enhanced rate of state pension for deferral was paid.

Case Study B: Individual with a personal pension income of £10,300 a year

Next, let’s consider the case of someone who also has a personal pension and starts to draw their benefits from it at age 66.

• The tax-free personal allowance is £12,570 in 2026/27.
• The full flat rate state pension is £12,547.60 a year in 2026/27.
• Their personal pension is paying them £10,300 a year.

The significance of this is that the retired person will pay some tax on their retirement pension because the combination of their personal pension and their state pension takes them above the £12,570 personal tax allowance. 

Let’s look at the calculations from Case Study A, but now taking account of the personal pension.

Example for a male

Scenario B1. Male, takes state pension immediately and lives for a further 19 years

^B Some of the personal allowance has been used up with the income from the personal pension. The balance remaining for the state pension is £12,570 - £10,300 = £2,270. £12,547.60 - £2,270 = £10,277.60.

Scenario B2. Male, defers state pension one year and lives for a further 18 years

^C Some of the personal allowance has been used up with the income from the personal pension. The balance remaining for the state pension is £12,570 - £10,300 = £2,270. £13,272.47 - £2,270 = £11,002.47.

Loss from deferral over their lifetime £53.88

Example for a female

Scenario B3. Female, takes state pension immediately and lives for a further 21 years

^D Some of the personal allowance has been used up with the income from the personal pension. The balance remaining for the state pension is £12,570 - £10,300 = £2,270. £12,547.60 - £2,270 = £10,277.60.

Scenario B4. Female, defers state pension one year and lives for a further 20 years

^E Some of the personal allowance has been used up with the income from the personal pension. The balance remaining for the state pension is £12,570 - £10,300 = £2,270. £13,272.47 - £2,270 = £11,002.47.

Loss from deferral over their lifetime £1,105.92

The key difference in Case Study B from Case Study A, is that the individuals are already using up £10,300 of their £12,570 tax-free personal allowance because of their personal pension. This means that only the remaining £2,270 (£12,570 - £10,300) is available to shield their state pension against tax, so the potential upside to deferral is smaller. By deferring, the individual ends up £53.88 worse off if they are a male with average life expectancy and £1,105.92 if they are female.