⚠️ We are currently updating our 2020/21 tax guidance across the website
What is state pension deferral?
Normally, you start to receive your state pension when you reach state pension age. But you have the option of deferring your pension, during which period you will not receive your state pension. State pension deferral means that you delay claiming, or stop your state pension, until a time that suits you. This page explains more about the tax consequences of deferral, and about some related benefits issues.
You can find out your state pension age by using the state pension calculator on GOV.UK.
Deferring your state pension may mean that you get extra money in the future. If you reached state pension age before 6 April 2016, you can take the extra money as a lump sum payment or as extra state pension. If you reach state pension age on or after 6 April 2016, you can only get extra state pension – no lump sum is available.
⚠️ You will also need to consider the effects of inflation, which we do not take into account.
Why would I defer my state pension?
There are different reasons why you might choose to defer your state pension. Some of the most common might be:
- There is no financial need for you to take the income immediately and you regard the financial terms for deferral offered by the Pensions Service as an attractive form of saving.
You are putting off claiming state pension until you have stopped working and may then pay no tax (or a lower rate of tax) on an increased regular state pension.
- You are using deferral as a method of saving tax by converting taxable pension into a potentially tax-free or lower-taxed lump sum. The exact tax treatment will depend on your circumstances when you take the lump sum (note: a lump sum is only available if you reached state pension age before 6 April 2016).
- You are using deferral as a method of maximising your tax credits claim.
- You are using deferral as a method of receiving a better value from your state pension if you are resident in a country where the UK does not give annual increases, for example, Australia.
We look at some of these points further below.
What will I get when I claim my deferred state pension?
If you reached state pension age before 6 April 2016
If you reached state pension age before 6 April 2016, a deferral in claiming it would give you two possible options when you decide eventually to claim it:
Extra state pension
You can earn extra state pension at 1% of the weekly pension for every five weeks you put off claiming. You must have put off claiming for at least five weeks to get extra state pension.
For example, if you deferred your state pension of £100 for the minimum period of five weeks, your state pension would have gone up to £101 a week from week six when you started to take it.
Lump sum payment
You can choose to take a lump sum rather than an increased rate of pension. The amount of the lump sum is the amount of state pension not claimed plus interest which is added each week and compounded. The rate is roughly 2% above the Bank of England's base rate. To get a lump sum, you have to put off claiming your state pension for at least 12 consecutive months.
In some cases when a person chooses a lump sum it is not possible to determine a final amount for some reason, for example because of an unresolved issue about their contribution record. In these cases, the person will receive a payment on account of the final amount of the lump sum they will eventually be entitled to.
When you choose to begin receiving your state pension, any lump sum becomes payable. But you can choose to have the lump sum paid in the tax year following that in which you begin receiving your state pension if you wish.
The lump sum is taxable, because the state pension is taxable income. However, it is not taxed in quite the same way as regular state pension income. There is more information on how state pension lump sums are taxed on our page What tax do I pay on my state pension lump sum?.
Fred and Elsa deferred their state pensions from 6 April 2015. In May 2020 they stop deferring and claim their pensions. They inform the Pensions Service of this decision. So, from May 2020 they are paid their normal state pension.
They then receive notices which explain to them that they could choose to receive some extra state pension or they could choose to receive a lump sum. The notices also explain that they have three months from the date on the notice to make their decision.
They wait until July 2020 before choosing a lump sum. The lump sum that had accrued to them between 6 April 2015 and May 2020 is paid to them shortly afterwards. Their lump sums are taxable in the 2020/21 tax year because they did not choose for them to be paid in the later tax year, 2020/22.
If you reach state pension age on or after 6 April 2016
If you defer claiming, you may get extra state pension when you decide to claim it.
You can earn extra state pension at 1% of the weekly pension for every nine weeks you put off claiming. You must put off claiming for at least nine weeks to get extra state pension.
For example, if you defer your state pension of £100 for the minimum period of nine weeks, your state pension would go up to £101 a week from week ten when you start to take it.
The extra pension will be paid with your normal state pension and taxed in the usual way, as explained below.
What is the effect of taxation when I decide to stop deferring?
The state pension, including any extra state pension, is taxable income even though no tax is deducted before it is paid to you. HM Revenue & Customs (HMRC) take it into account when they set your Pay As You Earn (PAYE) code. If the state pension is your only source of income or your total taxable income is less than the personal allowance (£12,500 for 2020/21), no tax will actually be payable. We explain tax on the state pension further in How is my tax collected?.
If you reached state pension age before 6 April 2016 and choose to take a state pension lump sum, it will be taxable in the tax year in which you eventually decide to claim it or, in certain circumstances, the following year. The tax rate on your lump sum will not exceed the rate at which you are already paying income tax.
For more information on the taxation of state pension lump sums see What tax do I pay on my state pension lump sum?.
What happens if my tax rates change?
In the year in which you retire or finally retire it might be that your tax rate will be higher, because of your employment income being included in the calculation, than it would be in the following year when you may have a reduced income in retirement. That situation might cause you to defer receiving your pension and extra pension (or lump sum, if you reached state pension age before 6 April 2016) until the later year when your tax rate is lower.
If you reached state pension age before 6 April 2016 and are able to claim a lump sum when you stop deferring your state pension, you can ask for the payment of the lump sum to be paid in the tax year after the one in which you claim your pension. You will need to consider whether you should ask for this later payment, as it might mean you pay less tax.
If you are thinking of taking a pension lump sum under either the flexible pensions or trivial commutation rules, you need to co-ordinate when this is taken with any state pension deferral planning, as those types of pension lump sums are taxable as ordinary income and might push you into a higher tax rate.
What is the effect of deferral on tax credits?
The amount of pension deferred will not count as income for tax credits while it is being deferred. That is, you only count your state pension as income for tax credits purposes if you actually claim it. (The rules for pension credit and universal credit are different and you should seek specific advice – see our Getting help page – if claiming universal credit whilst deferring your pension.)
Extra state pension, if and when it starts to be paid, will count as income for tax credit purposes.
For those who reached state pension age before 6 April 2016 and who claim a lump sum, this will also count as income for tax credits purposes in the year in which you claim to end the deferral unless you delay receiving the lump sum until the start of the next tax year. It might be beneficial to delay it if, for example, you would not be entitled to tax credits anyway for the later year.
More about deferring receipt of a lump sum to the start of the next tax year can be found on our page What tax do I pay on my state pension lump sum?.
Where can I find more information?
For more information on the tax treatment of your state pension lump sum see What tax do I pay on my state pension lump sum?.
GOV.UK has more general information on the basic state pension.
GOV.UK has more information about the new state pension – if you reach state pension age on or after 6 April 2016.