For those currently retiring the state pension stands at £168.60 per week, or £8,767.20 per year. Most would agree that this is not nearly enough to live on. Someone on minimum wage working a 40-hour week earns over £17,000. In other words, the state pension is around half the minimum wage.
Deferring your state pension
Rather than taking your state pension as soon as you become eligible, you can choose to defer it. The longer you defer it, the more you’ll get. It increases by 1% for each complete 9 weeks you defer. This works out at about 5.8% for each year of deferral. Of course if you defer it you’ll need to live on something else instead. Let’s see what that might mean.
Say you decide to defer by 5 years. Then at retirement you’ll receive £11,300 per year, ignoring inflationary adjustments. So to replace the missing £11,300 over the next 5 years you’d need to have saved about 5 times that amount, namely £56,500.
Is deferral worth doing?
So saving £56,500 enables you to ‘buy’ roughly an extra £2,532 a year of guaranteed income. That’s equivalent to buying an index-linked annuity returning 4.5% per year. That’s a much higher rate than you’d get buying an actual index-linked annuity, where the rate would be more like 2.7%. It’s also more than the commonly cited 4% drawdown rule.
So on the face of it, deferring can appear attractive in this example. Is there a downside? Possibly. If your health is worse than average there’s an increased chance you won’t live long enough to reap the benefits.
Should you defer?
Each person’s situation is unique, in terms of both finances and health. Also income tax considerations affect the calculation, sometimes in ways that increase the uplift from deferral. You can use our retirement calculator to try out various possible combinations of retirement date and increased pension. You may wish to consult an independent financial adviser before deciding whether to defer.