Deferred Pension: Definition & How It Works

A deferred pension is a payment that you intentionally delay taking until later in life. In deferring a pension, one may ask questions like, Does a pension increase in value as a result of deferment? You would also wish to know the problems associated with deferred pensions in your state, that is to say, the pros and cons that may come with deferring a pension in your state.

All these questions, plus how to use the deferred pension calculator to calculate the pension’s value increase would be discussed in this article. So, join us as we set the ball rolling.

What Is Deferred Pension

A deferred pension is a delay in accessing the funds you have accumulated in your pension bank until your retirement. It can also refer to as an act of delaying when you should start taking your state pension. Usually, the state pension is a regular payment from the government to support you in retirement. But how much you get and when you will be able to claim it can vary. Also deferring your state pension could increase the payments you get when you decide to claim it. Your pension will automatically defer until you claim it. The longer you wait before accessing your savings, the higher your potential retirement revenue could be.

Deferring State Pension

The UK, State Pension age is currently at 66 for men and women. While you cannot access your pension entitlement before this age, you can delay it until you’re older than 65. If you choose to defer your State Pension, you’ll receive a higher income based on the amount you would have received plus interest; depending on when you’re due to reach the State Pension age. Delaying claiming State Pension could make you eligible for a lump-sum payment.

In deferring your pension you can use the deferred pension calculator to calculate your state pension which enables you to know when to defer your state pension; see below.

State Pension Age Before 6 April 2016

For every 5 weeks that you defer your State Pension; the amount you receive will increase by around 1%, totaling 10.4% over a year. If you qualify for the Basic State Pension and defer it for a year. The amount you’ll receive will increase from £137.60 a week to £151.91 a week (2022/23). If you defer for a year or more, you could qualify for a lump sum payment.

State Pension Age After 6 April 2016

For every 9 weeks that you defer your State Pension; the amount you receive will increase by around 1% totaling 5.8% over a year. If you qualify for the new State Pension and defer it for a year. The amount you’ll receive will increase from £179.60 a week to £189.97 a week (2022/23). If you’ve reached State Pension age since 6 April 2016 or are due to; you won’t be eligible to receive a lump-sum payment. You’ll need at least 10 years of National Insurance Contributions to qualify for the new State Pension. And 35 years to receive the full amount. You can check State Pension entitlement online. If you haven’t paid enough for National Insurance, deferring your pension could help you to improve your contribution record. 

Why Do You Need To Defer Your Pension? 

There are several reasons why people choose to defer their 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. You have to decide when to retire for example. Some people aspire to retire early; if they want to work past their 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 the best effect.

#3. You Want To Pass It on To Loved Ones

If you die at the age of 75 years and did not touch your workplace or personal pension, it will be tax-free to your chosen beneficiaries. Your pension is not in your estate for inheritance tax purposes either.

#4. To Give Your Pension Longer To Grow

If 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 a deferred pension problem 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 to your payments 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

Does a Deferred Pension Increase in Value

A deferred pension can increase in value if you work for a company (and you’re an active member of the scheme.) Your pension will continue to increase year on year, with the amount you receive at retirement; which is usually on the number of years you work for the company, along with the pension benefits you receive. The annual increase in value of the deferred pension will count through the Board of Trustees, or it may be specified in the scheme rules.

If you’ve been a member of a defined benefit (final salary or a career average) pension scheme for at least two years,  the guaranteed income you have built up will remain in the scheme and you will be able to claim it at retirement age as the deferred pension keeps increasing in value. Some schemes may also offer you this option if you’ve been a member for less than two years.

When you leave the scheme, the scheme administrator will work out the amount of guaranteed income that you’ve built up, based on your length of membership in the scheme and your earnings. They’ll tell you the amount of the income (this now refers to your ‘deferred pension’).

The value of your deferred pension will increase in line with inflation each year from the date you leave the scheme to the retirement date.

Although you are no longer paying into the pension, the deferred pension continues to increase in value, and the impact of inflation erodes the value of income, meaning that it is worthless in years to come. However, most Final Salary pension schemes will index (also known as revaluing) the deferred income in line with inflation so that it maintains its value over time.

If you are a member of a Final Salary pension scheme for at least two years you will have the option to leave your benefits within the pension scheme. In some cases, you may also have this option if you have been a member of the Final Salary scheme for less than two years.

If you receive your benefits on or after age 55, or if you receive your benefits before age 55 because of ill health; and you are not capable of engaging in any regular full-time employment, your deferred pension increases in value each year in line with the cost of living.

Otherwise, if you draw your benefits before age 55 you will normally have to wait until your 55th birthday for your first cost of living to increase when your deferred pension will increase its value to the level it is supposed to increase each year.

Some situations may incur some deferred state pension problems which are listed below

Deferred State Pension Problems

The deferred State Pension problems are drawbacks to deferring a private or workplace pension, which you weigh up before deciding whether to delay taking your pension or not. These are the disadvantages (Cons) and advantages (pros) of deferring your pensions. They include:

Disadvantages of Deferring your pension

The following are the deferred pension state problems that you’re likely to encounter:

• You may delay retirement to give your pension the chance to grow in the stock market. However, when your pension gets the invested fall in value so will the value of your pension pot.
• If annuity rates fall during the time you receive your deferment, the regular income you secure may be lower than if you already buy 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. this may result in some deferred state pension problems
• 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.

Advantages of Deferring Your Pension

As with the problems, there are also some benefits that come from deferring your pension

• You are giving your pension more opportunities 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 will be receiving 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.

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 receive 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. YOu can also calculate your state pension using the deferred pension calculator

Deferred Pension Calculator

Using the deferred pension calculator in calculating your state pension the amount of extra State Pension you could get depends on when you reach State Pension age. 

You can use the deferred pension calculator to calculate your State Pension which will increase every week you defer, as long as you defer for at least 9 weeks.

Your State Pension increases by the equivalent of 1% for every 9 weeks you defer. This works out as just under 5.8% for every 52 weeks. The extra amount is payable with your regular State Pension payment.

Example:

If you use the deferred payment calculator to calculate your pension You get £179.60 a week (the full new State Pension). By deferring for 52 weeks, you’ll get an extra £10.42 a week (just under 5.8% of £179.60).

This example assumes there is no annual increase in the State Pension. If there is an annual increase, the amount you could get could be larger.

However, if you reached the State Pension age, you can usually take your extra State Pension as either:

#1. Higher Weekly Payments

When you claim your deferred State Pension, you’ll get a letter asking how you want to take your extra pension. You’ll have 3 months from receiving that letter to decide. Higher weekly payments Your State Pension will increase every week you defer, as long as you defer for at least 5 weeks.

Your State Pension increases by the equivalent of 1% for every 5 weeks you defer. This works out as 10.4% for every 52 weeks.

The extra amount is payable with your regular State Pension payment.

Example: Using the deferred pension calculator to calculate You get £137.60 a week (the full basic State Pension). By deferring for 52 weeks, you’ll get an extra £14.31 a week (10.4% of £137.60).

This example assumes there is no annual increase in the State Pension. If there is an annual increase, the amount you could get could be larger.

#2. Lump-Sum Payment

You can get a one-off lump sum payment if you defer claiming your State Pension for at least 12 months in a row. This will include the interest of 2% above the Bank of England base rate.

You will receive a tax payment at your current rate on your lump-sum payment. For example, if you’re a basic rate taxpayer your lump sum will tax up to 20%. Although, if you’re in prison, you will not build up an extra State Pension until you leave prison.

Annual Increases

After you claim your State Pension, the extra amount you get, because you deferred, will usually increase each year based on the Consumer Price Index. It will not increase for some people who live abroad. This may lead to some deferred state pension problems.

Deferred Pension FAQs