Should you defer taking your state pension?

Did you know that the government will reward you if you don't claim your state pension immediately?

You don't have to retire to claim the state pension - in fact, many people continue working and claim it at the same time. But, if you don't need that extra cash, it could be worthwhile delaying when you take it because the amount you receive increases the longer you delay in taking it.

Obviously you are getting no state pension at all during that time, so is it worth waiting for the bigger payment or should you take what you are entitled to?

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If you defer commencement when you hit state pension age, then your payout will increase by one per cent for every nine weeks you delay by. Those who hit state pension age before this 6 April get a bonus - it increases by one per cent for every five weeks for them.

Not only will your pension grow, but as pension payments are revised and increased each year, that deferral is also inflation-linked.

"If you do not depend on the state pension to buy your groceries (the basic amount is just under £120 per week), you might choose to defer," says John Kay in the Financial Times. "I would argue that you can treat that deferral as an investment."

You're allowed to defer your state pension at any time, even if you have already started taking, although you can only do that once.

If you hit state pension age before 6 April this year then there is an added incentive – you can take the amount you've deferred as a lump sum.

"This is a useful option if you are not feeling well," says Kay. "While you may not be drawing much pension in the future, you can at least spend your last days on a round-the-world cruise."

Another reason you may want to defer your pension is income tax. Your state pension is taxable so if you are still working and are a higher rate taxpayer, you could be forced to hand 40 per cent of your state pension back to the taxman.

"If it is possible that your future tax rate will be lower, perhaps because you stop working, then deferring your state pension makes sense," says Teresa Hunter in the Daily Telegraph.

But, there are drawbacks. No one knows how long they will live, so you could delay taking your pension only to die having never claimed the benefit you were entitled to.

Another reason not to defer is if you think you can make a better return elsewhere. Some confident pensioners may want to take their state pension and invest it.

So, how do you go about deferring your state pension? It's simple - do nothing. You have to claim your pension when you hit the appropriate age, if you don't, it is automatically deferred.