How to increase your state pension income

Rachel Lacey reveals how deferring your state pension could boost your annual pension income.

With the triple lock returning in 2023, pensioners will be relieved to hear that they should get a bumper increase to their state pension in April. The so-called triple lock ensures the state pension rises each year in line with either 2.5%, earnings growth or inflation. 

In September – the month that matters for the triple lock - the Consumer Price Index (CPI) is expected to hit 10% – meaning pensioners could see their state pension increase by £960 a year from April.

But the triple lock isn’t the only mechanism that can boost your state pension.

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If you’re eligible to claim the state pension, but are fortunate enough to be able to manage without it, perhaps because you are still working or have other sources of income, you can increase your future retirement income by deferring.

What is state pension deferral?

State pension deferral involves taking the decision not to claim your weekly payment as soon as you reach state pension age.

In return for not claiming your state pension as soon as you’re eligible, the government agrees to boost your payments further down the line.

How much extra will I get?

Your state pension will increase by 1% for every nine weeks that you delay taking it. So, by deferring your pension for a full year, you could increase it by just under 5.8%.

That would see the weekly payment for somebody claiming the full new state pension rise from £185.15 to £195.85 – an increase of £10.70 a week.

This top up will also be applied to annual increases to the state pension, meaning you could get even more.

Is it worth deferring my state pension?

This offer is available to anyone that reached state pension age on or after 6 April 2016.

It’s not as attractive as the deal offered to people that reached state pension age before that date – they get an equivalent boost of 10.4% over the year – as well as the option of taking their increase as a lump sum, if they deferred for a year.

Nonetheless, even if you don’t qualify for the enhanced terms offered to those who reached state pension age before new flat rate pension was introduced, it may still be worth considering deferral.

Ultimately, whether or not it makes financial sense for you comes down to your life expectancy.

Currently somebody claiming the full new state pension would get approximately £9,628 a year. However, if they decided to defer for a year, that income would be boosted by £556 a year to £10,184.

Based on these figures it would take around 17 years to recoup the £9,628 that they missed out on in the first year and start benefiting from deferral.

In reality it might actually be a little faster than that because these figures don’t take increases to the state pension into account.

And, when you consider that many people go on to live for 30 years or more, sacrificing one year of state pension could turn out to be a very clever move.

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The most important consideration is your health. If you’ve got any medical problems or have a less than healthy lifestyle, you might not live long enough to make the deferral worthwhile.

You might also want to think about what your spending habits are likely to be during the period you’d be deferring. If you’re planning to kick off retirement in a big way with holidays and trips, you might want all the income you can get when you first retire.

Are there any other benefits to state pension deferral?

The most obvious reason to defer taking the state pension is simply to boost your future retirement income.

However there are some other benefits to state pension deferral too.

Your state pension income will be subject to tax, so if you are still working or have other sources of income, deferring it could reduce the overall level of income tax you pay. This can be particularly beneficial if the state pension payment is likely to push you into a higher tax bracket.

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Another reason you might be tempted to defer your pension is if you’ve retired to a country where you don’t get the benefit of state pension increases such as Australia, Canada or India. In these countries payments are frozen from the point you start claiming, so deferring it and boosting your eventual payment may make sense. However, again you’ll need to consider whether you’ll live long enough to recoup the money you miss out on initially.

How do I defer my state pension?

If you haven’t started claiming your state pension yet, it’s easy to defer. There’s no paperwork or requests to submit, you simply don’t claim it. The only exception is if you are claiming certain benefits, in which case you’ll need to inform the Pension Service of your intention to defer.

For those that decide to defer their state pension after they’ve started claiming, it’s simply a case of telling the Pension Service that you want to stop receiving payments for a while.

It's worth noting that you can’t build up any additional state pension entitlement when you’re also claiming certain benefits. The rules on benefits are complicated, so it makes sense to get advice from Pensionwise or Citizens Advice before making a decision.