This piece first appeared in Saga Magazine in November 2008
The text here may not be identical to the published text



When you reach state pension age – 65 for men, 60 for women until April 2010 – you have to decide what to do about your state pension. You can claim it whether you continue to work or not. Or you can leave it and claim it later. The simplest thing to do is to get your claim in up to four months before your birthday and wait for the money. But if you do not claim then you can choose between a bigger pension or a backdated lump sum – and in some cases with generous interest paid on that.

If you delay your claim up to five weeks you have no choices. You just get the pension you missed back to your birthday (in fact the Monday after) paid as a lump sum with no interest.

If you claim more than five weeks after your birthday you can give up the backdating and have a higher pension paid from the week you claim it. The amount will be increased by one fifth of one per cent for each week between your birthday and the time you claim. There is no time limit so you can put off claiming for one year, five years or even ten years. For each year you delay claiming your pension it will be increased by just over 10 per cent. That will boost the full basic pension by £9.43 a week for each year you delay. If you don’t draw your pension for five years (until 70 for a man or 65 for a woman) it will be more than 50 per cent higher. If you wait another five years your pension will more than double.

The table shows the increase in the basic pension. If your pension is more or less than this – the average state pension is £118 for a man and £97 for a woman – then you will get the percentage increase on that amount. The pension will also rise each year in line with inflation.

Wait for

Basic pension

(at April 2008)


£ %

Total weekly pension

1 year





2 years





3 years





4 years





5 years





6 years





7 years





8 years





9 years





10 years





Note: At April 2008 rates. Pension and increments will be raised each year with inflation.

Lump sum

If you delay claiming for up to a year and choose not to have the increase to your pension then you can get your pension backdated to your birthday but you will get no interest. If you delay for a year or more the lump sum paid is worked out in a different way. You get the full amount of the pension backdated to your birthday plus generous interest worked out week by week on the pension you have not been drawing. The rate of interest will be the Bank of England’s official Bank Rate plus two per cent. Over the last three years the average Bank Rate has been around 5%. So over that time interest on the pension not claimed would have been paid at the rate of 7% a year.

The table shows the approximate lump sum based on the standard basic state pension. If your pension is more or less than that, then the lump sum will be larger or smaller. The pension that goes towards your lump sum will also be raised each year with inflation.


Basic weekly pension (April 2008)

Pension not paid


Lump sum paid

1 year (minimum)





2 years





3 years





4 years





5 years





6 years





7 years





8 years





9 years





10 years





Note: At April 2008 rates. Figures are approximate and rounded and assume bank rate remains at 5% and bonus at 2% for whole period.

The lump sum is taxed at the rate of tax you pay in the year you claim it. So if your annual income is less than the tax allowance (currently £6,035 a year for those under 65 and £9,030 for older people) you will pay no tax on the lump sum. If your income is more than that you will pay 20 per cent of your lump sum in tax unless you are a higher rate taxpayer when you will be taxed at 40 per cent. However large it is the lump sum will not affect your entitlement to means-tested benefits. About 26,000 people have claimed lump sums since they began in April 2005.

If you delay claiming your pension, either to get the increments or the lump sum, there is a risk you may never live to enjoy it. If a pension has been deferred for more than a year then a spouse or civil partner – but no-one else – may be able to inherit the lump sum you would have been entitled to at the date of death on your basic state pension, half the lump sum due on your graduated retirement benefit or state second pension, and between half and all of the lump sum due on your SERPS. In order to claim the lump sum when you die your spouse must be over pension age. A widow – and from April 2010 a widower or civil partner – who was under state pension age at the time of death can get the lump sum when they reach pension age and claim a state pension themselves. The rules are very complex and are set out – though not always very clearly – in a 104 page guide (and 15 pages on inheriting the lump sum!) available from the pension service

Alternatively, a spouse can get the increase on our basic pension and half the increase on any graduated and additional pension you have earned by deferring your claim.

If you have no spouse then everything is lost. You can avoid that risk by drawing your pension at once and putting it each week into a high interest savings account. That will probably mean you end up with rather less than the lump sum the Government will give you. But the money in that account would form part of your estate and could be inherited in full by your spouse, children or others – subject to inheritance tax of course if you have other substantial assets.

Alternatively you could put your state pension directly into a personal pension. That would avoid paying tax on it and it would grow tax-free until you reached the age when you wanted to retire (but no more than 75). You could then draw a quarter of it as a tax free lump sum and convert the rest into an income for life.

If you have debt it is always better to draw your pension and use it to pay off the debt.

If you are already drawing your pension you can stop doing so and defer it to gain either a bigger pension or a lump sum.

Deferring your pension does not affect the choice made by your spouse to defer their pension paid on their own contributions. However, if a married man defers his pension then his wife cannot claim a married woman’s pension on his contributions until he claims his own pension. If she has a smaller pension herself which she has already claimed she will not get increments or the opportunity of a lump sum on the pension on his contributions.

If you deferred your pension before 6 April 2005 the rules were different with smaller increments and no lump sum with interest paid after a year.

Further information
0845 60 60 265

November 2008


All material on these pages is © Paul Lewis 2008