You’ve worked hard most of your life and paid into your state and workplace pension for decades â so, as you approach retirement, it’s natural to start thinking about how you might spend your income.
However, before you start drawing your pension, take a moment to assess your current financial situation and lifestyle. Are you planning to work beyond the age of 55 (the earliest age you can start drawing a pension)? Or even past the state pension of 66 (set to increase to 67, and eventually 68 for those born after 5th April 1960)? Do you have investments you’re looking to cash in, or a reliable income from a buy-to-let property?
If you answered ‘yes’ to any of these questions, itâs worth considering a deferred pension. This can be a smart financial decision but like anything, it shouldn’t be rushed into. There are specific rules about how long you can delay payments for, which are also affected by what other payments or credits you might be receiving from the state at the time.
It’s also important to note that the rules vary depending on where you’re spending your retirement. This can get complex, which is why we always recommend talking to a pension advisor before you proceed.
So why would you defer payments you’re entitled to, how do you go about it, and what do you need to know before you make your decision? We’ve put together this guide to help you get started.
What is a deferred pension?
A deferred pension is a pension which someone has chosen to delay claiming until later on in life. When you reach the eligible age to start claiming your state, private or workplace pension, you can choose to start receiving your pension then or defer. There are many reasons why you might choose to defer, which we explore in more detail below.
What are the benefits of deferring your pension?
By delaying when your state pension payments* kick in, or temporarily pausing your pension after you start claiming it, you effectively save up the money that you would have received. When you do start claiming, the payments you receive will be higher as a result, provided you have deferred those payments for more than nine weeks.
Delaying your state pension for as long as you can means you can increase your nest-egg â and if you’re in good health and don’t mind waiting a little longer for your money, there are significant benefits. For example, if you have a good company pension which is giving you a decent income from the moment you retire, you may not need the state pension. Anyone in this position could treat the state pension as a savings pot which appreciates over time.
You can also defer your workplace or personal pension. By keeping it invested in the pot for longer, you could be in line for higher payments when you eventually draw it but always check the details of your pension plan with your provider. If you have a defined contribution pension, deferral might mean you lose any income guarantees and investment bonuses*. On the other hand, if you have a defined benefit pension (including final salary pension), there may be little to gain from deferring it*.
Deferring a pension can also be beneficial for people who have moved abroad and retired but wish to keep claiming their UK state pension. Since the state pension only increases in line with inflation, any boost to the amount available is going to be welcome.
Whether or not this is the right option for you depends on your own circumstances, and a variety of factors which you need to understand fully. Again, this is where a good pension advice service can help.
How do you defer your pension?
State pension payments don’t automatically kick in with retirement, you have to apply to start claiming them*. So deferring is actually very easy, in that you simply hold off applying for those payments to start. In other words, deferring is the default option.
You can either delay the date on which your pensions payments start, or put a stop on payments after they have. Provided you do this for a minimum of nine weeks, you can start to enjoy the benefits of the deferred pension after that period.
It’s important to note however that taxes could apply in both cases â the government guidance on pension taxation is here. There are also complications if you are on benefits at the time you decide to delay your pension, which you need to be clear about before you make a decision.
Your pension advisor should be able to give you the full picture on all the things you need to be aware of, including how any benefits will affect your decision, and tax liabilities on deferred payments.
Things to consider when deferring your pension
Many of the rules around pensions touched on here were only introduced relatively recently, under the New State Pension deal. Given the pressures on the UK economy in general, and the Treasury, Department of Work and Pensions, and other bodies with oversight into pensions, it’s a smart move to keep on top of the details. Things might change.
For example, the rules of the new deal only apply if you retired after 6th April 2016. If you retired on or before this date, you are only eligible to what’s on offer under the basic state pension.
There are also various rules concerning those people who are claiming other state benefits who might wish to take a deferred pension. The list of those benefits is long and includes pensions credits, carer’s allowance, income support and incapacity benefit.
To find out more, book an appointment with one of our specialist pension advisors.
*Clicking on an external link means you will be departing from the regulatory site of Almond Financial. Neither Almond Financial nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.