How to Defer Your Pension
If you aren’t ready to retire, want to build more retirement savings, or simply don’t need to claim your pension yet, you can choose to defer your pension and boost your savings.
You can access any defined contribution pension from the age of 55, but there is no rule saying when you have to start taking money from it. If you have enough income to live on, then deferring when you take your pension can come with a lot of benefits.
What does deferred pension mean?
Deferring your pension simply means delaying when you start drawing an income from your pot. It can also refer to delaying when you start receiving your state pension.
Why defer your pension?
There are several reasons you may want to defer your 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 then. It is up to you, and your employer, when you choose to retire. You may want to work past your state pension age in which case you may not need to start drawing an income from your pension for a few more years.
2. You want to spend other savings first
Pensions are very tax-efficient and there are often good reasons to leave them untouched, especially if you have other savings you can spend first. If you die before 75 and haven’t touched your pension it can be passed tax-free onto your beneficiaries. Your pension isn’t included in your estate for inheritance tax purposes either.
3. Your pension has longer to grow
If you are worried about having enough in your pension to provide you with a decent income in retirement, then deferring your pension for a few years can be one way to help. By leaving your pension alone it has longer to grow, which means you could end up with a larger income when you do eventually retire. However, this is by no means certain and your pension fund value could also fall.
4. You can continue to get tax relief on contributions
You can continue to enjoy tax relief on pension contributions until you are 75. However, if you access your pension could potentially restrict the amount you can pay into your pension and get tax relief on, from up to £40,000 down to just £4,000.
5. You can boost your state pension
It isn’t just personal pensions or workplace pensions that you can defer, you can also delay when you start receiving the state pension. For every nine weeks that you defer taking your state pension the amount you receive when you do get it will increase by 1%, totalling 5.8% a year.
But on the flip side, by delaying for 12 months you’ll miss out on £9,339 in payments, based on full state pension for the 2021/22 tax year. You would need to live for 17 years after you start taking your pension to recoup that money if you defer by just 12 months.
» MORE: Guide to the state pension
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 face additional fees 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. Before you do this, it might be worth getting financial advice to make sure you don’t miss out on valuable benefits by moving your pension.
The pros and cons of pension deferral
There are benefits and drawbacks to deferring your pension. These include:
- More time for your pension to grow.
- You can continue making pension contributions and getting tax relief on those payments. Your employer may also continue paying into your pension.
- Generally, annuity rates improve as you get older, so you may get a better level of income on an annuity purchase.
- There are tax benefits to passing on your pension to beneficiaries rather than cash savings.
- Your pension won’t have to sustain you for so many years if you reduce your retirement by delaying.
- No-one can predict the stock market. You may delay retirement so your pension can grow, but if the stock market falls you could see your pension lose value.
- You may miss out on valuable benefits if you don’t check your pension provider’s rules before you delay.
- Your pension could breach the lifetime allowance leading to a tax charge if you let it grow too big.
- If delaying retirement boosts your pension income it could affect the amount of income tax you pay.
Where can I get financial advice?
Everyone aged over 50 with a pension is entitled to a free pension consultation with the government’s PensionWise service. For full advice and recommendations based on an assessment of your needs you can consult an Independent Financial Adviser at Unbiased or via the Personal Finance Society.
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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