How to Defer Your Pension
If you are not ready to retire, want to build more retirement savings, or simply don’t need to claim your pension yet, you may want to defer taking your pension. Your state pension can also be deferred in return for increased payments in the future.
Deferring a pension can be a sensible move if you don’t need the retirement income your pension could provide immediately. While it’s possible to access a defined contribution pension from the age of 55, it doesn’t mean you have to start taking money from your pension at precisely that age. If you have enough income to live comfortably, you could defer taking your pension, allowing it the opportunity to hopefully grow further to provide a higher income in the future.
There is also no obligation to claim your state pension as soon as you reach state pension age. By deferring your state pension, your future weekly payments can increase – but you will need to work out if it’s likely to make financial sense,
What does deferred pension mean?
Deferring your pension simply means delaying accessing the funds you have accumulated in your pension pot until later in your retirement.
It can also refer to delaying when you start taking your state pension.
Why defer your pension?
There are several reasons why you may want to defer your workplace pension or personal pension.
1. You are still earning an income
The state pension age is currently 66, but that doesn’t mean you have to stop working at that point. It is up to you when you choose to retire – unless you are in a job that requires physical strength or has an age limit – construction work or the fire service, for example.
While some people aspire to retire early, if you want to work past your state pension age you may have no financial need to start drawing an income from your pension for a few more years.
2. You want to spend other savings first
Pensions can be tax-efficient and there are often good reasons to leave them untouched, especially if you have other savings you can spend first. It is important to think carefully about using your pension and savings to best effect.
3. You want to pass it onto loved ones
If you die before 75 and haven’t touched your workplace or personal pension, it can be passed tax-free on to your chosen beneficiaries. Your pension isn’t usually included in your estate for inheritance tax purposes either.
4. To give your pension longer to grow
If you are worried you don’t have enough in your pension to provide you with a decent income in retirement, deferring your pension for a few years may be able to help.
By leaving your pension untouched, you are giving it longer to grow and the potential to deliver a larger income when you do eventually retire. Equally, however, by leaving your pension invested, there is also the danger that its value could fall.
5. You can continue to get tax relief on contributions
If you continue to pay into your pension, you can further enjoy the boost to your pension contributions that pension tax relief provides. You could receive this welcome addition on your payments all the way up until you are 75.
However, once you begin to draw an income from your pension, this is likely to restrict the level of future contributions on which you can receive pension tax relief to just £4,000 a year.
» MORE: How pension contributions work
Can I defer my pension?
This will depend on the type of pension you have and the individual rules of your pension scheme. You need to check with your pension provider to see if you will lose any income guarantees or might incur additional charges if you delay taking your pension.
If your pension provider won’t allow you to delay your retirement date, you could transfer your pension to another provider that will. However, moving a pension is not a decision to be taken lightly, and seeking financial advice first is often a good idea, particularly if you have a defined benefit or final salary scheme.
You should also consider carefully the charges and features of any pension that you are thinking of transferring to.
» COMPARE: Personal pension providers
The pros and cons of pension deferral
There are benefits and drawbacks to deferring a private or workplace pension, which need to be weighed up before deciding whether to delay taking your pension or not. These include:
Advantages of deferring
- You are giving your pension more opportunity to potentially grow.
- You can continue making pension contributions and getting tax relief on those payments. Your employer may also continue paying into your pension.
- All other things being equal, as you get older, you are usually offered higher annuity rates than if you buy an annuity when you are younger.
- There are tax benefits to passing on your pension to beneficiaries rather than cash savings.
- If you intend to use pension drawdown to access the money in your pension, your pension won’t need to sustain you for as many years as if you had retired earlier. This may allow you to take larger withdrawals than you otherwise could have.
Potential disadvantages of deferring
- While you may delay retirement to give your pension the chance to grow, if the stock market or shares that your pension is invested in fall in value so will the value of your pension pot.
- If annuity rates fall during the time you are deferred, the regular income you secure may be lower than if you had bought an annuity earlier, even if your pension fund has grown.
- You may miss out on valuable benefits and guarantees if you defer beyond certain dates, as set out in the rules of your pension scheme. This may be particularly important if you have a defined benefit scheme.
- If your pension value grows too large, it could exceed your lifetime allowance and lead to a tax charge.
- By accessing your pension fund later, there is a greater risk that you won’t enjoy the full benefit of your pension savings before you die.
Deferring your state pension
While you must reach the state pension age of 66 before you can currently claim your state pension, you don’t have to start taking payments at that exact time.
By delaying your state pension, you may be entitled to larger weekly payments in the future. You can also call a halt to the state pension payments that you already receive to try to increase your future payments, but you can only do this once.
» MORE: All about the state pension
Is it worth deferring your state pension?
The level of benefit you could gain by deferring your state pension depends on when you hit state pension age. Any annual increase in the state pension while you are deferred could also contribute to a bigger uplift than shown in the examples below.
Your state pension age was on or after 6 April 2016
If you qualify for the new state pension introduced on 6 April 2016, once you have deferred for a minimum of nine weeks you will then become eligible for an uplift in your payments for each week that you defer.
Deferring for a period of nine weeks will result in a 1% increase in the amount that you receive when you do take your state pension – this is an uplift in payments of almost 5.8% for every full year you defer.
So if you qualify for the full new state pension of £179.60 a week, this would rise by £10.42 to £190.02 a week if you defer for one year.
What needs to be considered is that you’ll miss out on £9,339.20 in state pension payments across that 12-month period. And to recoup this amount through your weekly uplift, you would need to live for at least 17 years after you start taking your state pension.
Your state pension age was before 6 April 2016
If you qualify for the basic state pension that preceded the new state pension, you only need to defer for five weeks before your payments begin to increase – again these will be paid for each week of deferral. This is because the basic state pension pays a lower amount of £137.60 a week.
As a result, deferring for five weeks will deliver an equivalent 1% uplift, which equates to an increase of 10.4% over a year. One full year of deferral will see the full basic state pension pay an additional £14.31 each week, at an overall weekly payment of £151.91.
By deferring for a year, however, you will have given up £7,155.20 in state pension payments in total, a sum that it would take around nine-and-a-half years to recover in additional payments.
Another option if your state pension age is earlier than 6 April 2016 is to take the money you accumulate through deferring as a lump sum. To qualify for a lump sum, you must defer for a minimum of 12 consecutive months. Interest equivalent to 2% above base rate is added to the payment, and the lump sum is liable for income tax at your current rate.
Should I defer my state pension?
The pros and cons of deferring your state pension generally depend on your financial situation and how long you expect to live.
If you have personal or workplace pensions that are paying you an income, and you can afford to live comfortably without it, not claiming your state pension is an option you could consider.
The key is whether you think you will be able to recoup the money that you give up during the time you delay or defer. If you delay taking the new state pension for one year, you’ll be 67 when you do start taking it and will need to receive those enhanced payments for at least 17 years – so until you are 84 – before you effectively break even.
The uplift you receive each week after that is money you wouldn’t have had, so if you expect to live to 100 you will almost certainly have made the right choice. However, if your long-term health is of concern, deferring may not be the best idea.
If you die while your state pension is deferred, your spouse or civil partner can claim a lump sum or additional state pension, depending on their circumstances. If you haven’t touched your state pension and you are single or divorced, then your estate can claim three months of your state pension.
How can I defer my state pension?
In order to start receiving the state pension you either need to apply online or complete and return a form to the Pension Service, which you will receive at least two months ahead of reaching your state pension age.
So in most instances, if you want to defer taking your state pension, you simply do nothing and hold off claiming until you want your payments to start.
One exception is if you are in receipt of certain state benefits, which prevent you from accumulating additional state pension. As a result, if you receive any of the following and want to defer, you must contact the Pension Service:
- carer’s allowance
- incapacity benefit
- income-based jobseeker’s allowance
- income-related employment and support allowance
- income support
- pension credit
- severe disablement allowance
- unemployability supplement
- universal credit
- widowed parent’s allowance
- widow’s pension
If your spouse or civil partner receives either income support, pension credit, universal credit, income-related employment and support allowance, or income-related jobseeker’s allowance, this will also prevent you from receiving a higher state pension in the future.
If you want to suspend the state pension payments you are already receiving, you will need to inform the Pension Service of your intentions – contact details are available at Gov.uk.
Where can I get financial advice?
If you are unsure whether deferring your pension is a good idea, or have any other concerns about your retirement planning, everyone over the age of 50 can arrange a free pension consultation with the government’s Pension Wise service.
If you want full advice and recommendations based on a complete assessment of your situation, you may want to seek independent financial advice.
» MORE: Where to look for pension advice
Image source: Getty Images
Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more
Tim draws on 20 years’ experience at Virgin Money, Moneyfacts and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more