State pensioners who refuse their state pension payments for a whole year can gain an extra £727.48 a year for life, HMRC has confirmed, based on current rates. This little-known loophole involves deferring the state pension to increase the pension pot, which could result in collecting more money over an average lifespan than claiming as soon as eligible.
How Deferring Works
State pension payments are not made automatically; pensioners must inform the DWP when they want to start receiving their pension, even after reaching state pension age. The state pension age is currently rising from 66 to 67, with another planned rise to 68 potentially brought forward by seven years to 2038. For those still working when eligible, refusing the state pension for at least one more year may be financially beneficial.
Deferring the state pension for a year or more adds 5.8% to the pension pot for every year not claimed. On the full new state pension, this works out at £727.48 a year. The Government explains: "You can get your deferred pension as an extra payment on top of your regular payment. You must defer claiming your State Pension for at least 9 weeks before you can claim increased regular payments. For every 9 weeks you defer, you’ll get 1% added to your regular weekly pension payment for life. This works out as just under 5.8% for every 52 weeks (12 months) you defer."
Tax Benefits and Example
Deferring can also reduce tax liability for those still earning. Currently, state pension is not taxed if it's the only income, but working pensioners pay tax at their normal rate. For example, earning over £51,270 would result in losing 40% of state pension payments to tax. Deferring avoids this tax, potentially creating a "double win" of less tax now and more money later.
The Government provides an example: "You get £241.30 a week (the full new State Pension). If you defer for 52 weeks, you’ll get an extra £13.99 a week (5.8% of £241.30)." This amounts to £727.48 extra over 52 weekly payments. The £727 amount assumes a full National Insurance record of about 35 years; incomplete records would result in lower cash gains but still 5.8% of the total pension allowance.
Expert Advice and Considerations
Financial advisers Red Dot Group recommend reviewing overall financial plans, starting with a State Pension forecast, a free government service to check expected payments and identify NI record gaps. They note that deferring increases payments by around 5.8% per year, which may be valuable for those who can afford to wait.
Money expert Martin Lewis previously commented: "Defer your state pension, and the maths works out that if you live longer than typical life expectancy, you'll gain; if you live less, you'll lose. Live a typical lifespan and it'll be pretty neutral. So if you're in poor health, it's not really worth considering. If you're in great health with a history of family longevity, deferring could be a winner. Otherwise the real issue is tax – if you're earning or have a decent income now, but'll pay tax at a lower rate later on, then deferring can be very worthwhile."
