If you are approaching retirement age, you may be thinking about when to start taking your pension. You may not need to access your pension income yet and you might be wondering what a deferred pension is. Let’s take a look.
What is a deferred pension?
It’s a pension you have decided to delay taking payments from. One of the main reasons to defer your pension is to increase your retirement savings.
What types of pension can I defer?
You will be able to delay making withdrawals from the following pensions if you have them:
- Workplace pension
- Self-invested personal pension (SIPP)
- Stakeholder pension (SHP)
- UK State Pension
What about a defined benefit (final salary) pension?
Check with your pension provider since you may not be allowed to defer this type of pension. If you are, you may end up losing some of your guaranteed income or other benefits such as a guaranteed annuity rate.
Make sure you are fully aware of the terms and conditions when deferring this type of pension before making a decision.
What are the advantages and disadvantages?
Your pension will spend more time invested in the stock market. It will have a greater opportunity to grow, giving you a larger future income.
If you are still working and have enough income, leaving your pension untouched until you stop working could reduce your income tax bill.
There is no guarantee that the value of your pension will increase in the future. You may defer your pension only to end up making future withdrawals in the middle of an economic downturn.
If you delay taking your State Pension and you are on benefits, you will lose the amount you would have received over the period of the deferral.
There may be restrictions or charges involved if you choose to delay taking your pension. You will need to check with your pension provider.
What is the process involved with a deferred pension?
Workplace, SIPP or SHP
If you have a workplace pension, SIPP or SHP, you need to contact your pension provider who will be able to help you. Make sure you ask about the terms and conditions associated with deferring your pension.
UK State Pension
You will receive a letter two months before you reach State Pension age with instructions on how to start claiming it. At this point, you can choose to claim it or defer it.
Begin your journey to financial freedom today – try our new Hero’s Journey tool!
MyWalletHero is here to help you learn about taking control of your money, whether that’s paying off debt, working towards a short-term money goal, or investing for your future.
Our latest tool can help you understand the next steps on your journey – simply choose a goal that best describes your current interests to get started.
What happens when you defer your State Pension?
You can defer your State Pension for as long as you want. If you choose to do this, it must be the entire amount. You can also choose to defer your State Pension even if you have started claiming it.
Unless you were on state benefits during the period of deferral, you will receive an extra amount. This will depend on the period of deferral and your state pension age.
If you reached state pension age before 6 April 2016
You will receive an extra 1% for every five weeks your pension is deferred. In a full year, this will be 10.4% and for someone on a full basic pension of £134.25 per week, this amounts to an extra £726 per year.
You can choose to take this in instalments through higher weekly pension payments, or as a one-off lump sum. To be eligible for the lump sum, you must defer for 12 consecutive months.
If you reached state pension age on or after 6 April 2016
You will receive an extra 1% for every nine weeks your pension is deferred. In a full year, this will be 5.8% and for someone on a full basic pension of £175.20 per week, this amounts to an extra £528 per year.
You will not be eligible for a one-off lump sum payment.
Further information about deferring the UK state pension is available from the gov.uk website.
It’s a good idea to make plans at least six months before you are due to retire. There is a lot to think about, and a number of decisions that you will need to make, so don’t wait until the last minute.
Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.