Is it better to keep working and postpone your state pension?

Deferring your state pension and continuing to work might make sense because we are living longer and healthier lives

We examine its operation as well as its benefits and drawbacks.

The International Monetary Fund (IMF) announced in April that 70 is the new 50. The report found that people are living longer and in better health in many countries, which leads to longer and more productive working lives.

In the UK, the state pension age is currently 66. However, according to the UK's Annual Population Survey from last summer, 1 in 12 million people this age and older (9 in 5) are still employed.

According to the IMF, a person in 2022 who was 70 years old had cognitive abilities comparable to those of a 53-year-old in 2000. Significant progress had also been made in physical health, with 70-year-olds showing the same level of fitness as 56-year-olds did 25 years ago.

According to the findings, baby boomers have plenty of room to work longer if they so choose or if they require it, and they may be able to postpone taking their pension.

It may be worthwhile to postpone taking a pension until it is required, rather than only when pension age is reached, as the IMF discovered that those who remained employed experienced a 30% increase in earnings. The advantages of working longer can be both social and financial.

If you wait a little longer for your pension, it will be larger when you do receive it. This, along with additional income from working longer hours, can significantly increase your retirement fund.

Can a state pension be postponed?

Deferring the state pension may be a wise decision if you are getting close to the state pension age (currently 66, increasing to 67 by 2028) and believe you can live without it for a while. This is because you may still be employed, have a sizable private pension income, or are content to live off of tax-free sources like ISAs.

The amount you receive each week when you do take your state pension will increase if you postpone it until later.

But a lot of people don't know about this option.

A quarter (25 percent) of people between the ages of 55 and 64 are not aware that they can postpone their state pension, according to a survey conducted by retirement expert Just Group among 1,050 retired and semi-retired employees.

Women were substantially more likely than men to be unaware of the deferral option (26% vs. 19%). Of those over 55, only 7% reported having personally used state pension deferral.

We examine how deferring your state pension works, how much you will receive in additional income, whether it is worthwhile, and whether you should postpone receiving your personal and workplace pensions.

Putting off the state's basic pension.

The basic state pension would have been paid to those who reached state pension age prior to April 6, 2016, when deferral was especially alluring under the previous regulations.

You were given the option of receiving a lump sum payment plus interest for the pension foregone, or an additional 10.4% of your pension for each year of deferral.

There are still a few individuals who are deferred from before 2016. A letter requesting your preferred method of taking your additional pension will be sent to you when you claim your deferred basic state pension. After you get that letter, you have three months to make up your mind.

In the event that you choose to defer for a minimum of five weeks, your state pension will rise each week you choose to do so.

The five weeks do not include time spent incarcerated or receiving certain benefits for you or your partner.

The additional sum is covered by your regular state pension.

For instance, the full basic state pension, which is 176 point 45 per week, is stated. You will receive 18 points per week (10 points 4 percent of 176 points 45) if you defer for 52 weeks.

The alternative is to postpone your state pension claim for a minimum of 12 consecutive months in order to receive a one-time lump sum payment. The interest rate will be two percent higher than the base rate set by the Bank of England.

The lump sum payment will be subject to your current tax rate. As a result, if you are a basic rate taxpayer, your lump sum will be taxed at a rate of 20%, 40% for higher rates, and 45% for additional rates.

For this group, "it is worth being aware that your lump sum is taxed at the marginal rate in the year that you draw it," advises Steve Webb, partner at pension consultancy LCP, should they decide to take that route.

Additionally, he says, deferral loses appeal as one ages.

"This is because the number of years you have left to recover the money you went without declines, but the reward for deferral stays the same each year (an additional 10 percent on the base figure)," he explains.

Putting off the new state pension.

Hargreaves Lansdown's head of retirement analysis, Helen Morrissey, states: "If you believe you can live without it for a while, then you defer your new state pension increases by the equivalent of 1 percent every nine weeks.

For every 52 weeks, this equates to slightly less than 5 percent.

Assume, for instance, that you receive 230.25 per week (the entire new state pension). 52 weeks of deferral will earn you an additional 13 points per week (5 points 8 percent of 230 points 25).

Your regular state pension payment includes the additional sum.

Methods for postponing the state pension.

The state pension is not something you get automatically. You will receive a letter from the government stating that you will soon be eligible to claim your state pension, approximately two months before you reach state pension age.

You simply don't make a claim to postpone your state pension. You could receive a larger increase the longer you wait.

Is it worthwhile to postpone receiving the state pension?

You must compare the additional funds you will get by deferring to the funds you forfeited today. Basically, how long it will take to get your money back to ensure that deferring truly gets you what you paid for it.

For instance, you might not be able to fully benefit from deferring a year of the new state pension if you're not in good health. It will take about 17 years for you to receive higher pension payments.

It's also important to remember that if you or your spouse are receiving benefits like pension credit or carers allowance, you are not allowed to accrue additional pension.

If you have already begun receiving your state pension, you may still defer it, but only once.

Webb states: "Those who work past pension age are one group for whom deferral may be appealing.

You can take your state pension at a higher rate later when the tax situation will be more favorable, he says, because "you may not want your state pension taxed in full at your marginal rate on top of your earnings."

Is a private pension deferable?

Private pensions can be postponed, though the regulations will differ based on the type of pension and the specific plan.

You should check the specifics of your defined benefit plan because different plans may allow you to take your pension later and pay a higher pension.

You can typically start receiving your pension under a defined contribution (DC) plan at age 55 (it will increase to 57 in 2028), but you can postpone taking it if you wish to keep working, for example.

Morrissey explains: "Until you turn 75, you can keep making contributions to your pension and keep receiving tax breaks on them up to your annual allowance.

Does postponing a private pension make sense?

Although it's important to remember that markets can decline during this time, leaving a DC pension pot invested allows it to grow even more.

Morrissey adds, "It's also important to make sure you aren't possibly losing out on benefits like guaranteed annuity rates, which may depend on you taking an income within a specific time window."

Nevertheless, Webb notes that if your DC plan does not offer such a benefit, the longer you wait to take your pension, the better the annuity rate you will be able to get because you will be older when you do.

Keep in mind the MPAA, or money purchase annual allowance.

A hybrid strategy is one option. You could start receiving your state pension but refrain from taking any benefits from your private pension savings if your employment income needs to be supplemented, or the other way around.

However, beware of a trap here. Even a very small income from your private pension savings will probably put you in danger of running out of money purchase annual allowance (MPAA). This restricts your ability to contribute an additional £10,000 annually to your pension.

The MPAA was put into place to prevent people from taking their pension benefits and then immediately reinvesting them in order to receive additional tax breaks. It can catch you off guard, though, if you continue to make contributions to an employer-sponsored pension while receiving benefits from another private pension.