The Department for Work and Pensions (DWP) has shared a legal method for UK pensioners to increase their annual income by £694—tax-free. This underutilised strategy, known as state pension deferral, allows retirees to enhance their long-term income and reduce tax liability.
If you’re nearing State Pension age (currently 66, rising to 67 by 2028) and still working, this guide will help you understand how deferring your pension could legally increase your annual pension without being taxed at higher rates.
What Is State Pension Deferral?
Deferring your state pension means delaying the claim of your pension benefits after reaching the State Pension age. While this requires you to forego pension payments for a year or more, the UK government rewards you with an increased annual pension—currently set at a 5.8% boost for each year you defer.
This boost can amount to £694 annually, assuming you qualify for the full new State Pension, which is £221.20 per week in 2025 (or £11,502.40 per year).
Why Consider Deferring Your Pension?
If you’re still employed when you become eligible, your pension payments may be taxed at your current income tax rate. For instance, if your total income exceeds £51,270, you fall into the 40% tax bracket. That means nearly half of your pension income could go to the taxman.
By deferring:
- You avoid immediate taxation on pension income.
- You gain an additional 5.8% on your yearly pension.
- You receive increased payments for life once you start claiming.
How the £694 Benefit Is Calculated
| Detail | Value |
|---|---|
| Full New State Pension (2025) | £221.20/week |
| Annual Pension (Full Rate) | £11,502.40 |
| Annual Increase per Year Deferred (5.8%) | £667.14 |
| Rounded Estimated Annual Increase | £694 |
| Required NI Record | Approx. 35 full qualifying years |
Note: If you have fewer than 35 qualifying years, the 5.8% boost still applies, but to a lower base pension, meaning the monetary increase will be smaller.
Tax Implications of Deferring
Your state pension is taxable, but only if your total annual income exceeds the Personal Allowance, currently £12,570. However, due to frozen tax thresholds and rising pension values under the Triple Lock, more pensioners are being dragged into tax brackets.
Deferring allows:
- Avoiding taxation while still employed
- Starting pension later when income (and tax bracket) is lower
- Long-term tax efficiency and higher lifetime income
Expert Advice and Considerations
What Do Experts Say?
Martin Lewis, a financial expert, points out that deferring makes sense based on life expectancy and income levels:
“If you’re in poor health, it may not be worth it. But if you’re healthy and expect to live long, deferring can be a win.”
The Red Dot Group, financial advisers, recommend reviewing your State Pension forecast and NI contribution record. This free service reveals how much you’re on track to receive and any gaps you might need to fill.
Who Should Consider This Strategy?
Best suited for:
- Individuals still earning above £12,570 at State Pension age
- Those in good health with family history of longevity
- People in higher tax brackets now but expect lower income later
Not recommended for:
- Individuals with poor health or low life expectancy
- People relying on immediate pension income
Steps to Take
- Get a State Pension Forecast: Visit the government site to estimate your entitlement.
- Review Your National Insurance Record: Ensure you have enough qualifying years.
- Consult a Financial Adviser: Weigh deferral against your income and tax situation.
- Inform the DWP: You’ll need to notify them if you choose to defer.
Deferring your State Pension offers a legal, strategic way to increase your retirement income—up to £694 more per year, entirely tax-free if done wisely.
While it requires short-term sacrifice, the long-term gains can far outweigh the initial cost, especially for those in higher tax brackets or with additional income.
The approach may not fit everyone, but for many pensioners, it’s a powerful tool to maximize retirement benefits and minimize unnecessary taxation.
If you’re approaching State Pension age, consider whether deferring could make you financially better off for years to come.
FAQs
How much more do I get if I defer my State Pension for a year?
If you’re eligible for the full new State Pension, deferring for a year boosts your payments by 5.8%, or about £694 annually.
Will deferring my pension affect other benefits?
Yes. Deferring may impact means-tested benefits like Pension Credit or Housing Benefit. It’s best to consult an adviser before making a decision.
Can I change my mind after deferring my pension?
Yes, you can start claiming at any time, and your increased payments will reflect the deferral period. However, lump sums are no longer offered.