What is a deferred benefit pension

Imagine that you’ve now retired and your pension statement lands in your mailbox but you aren’t quite ready to cash it in yet.

Maybe you want to keep working, work part time or maybe just want to let your savings grow. That’s where a deferred benefit pension comes in – a way that lets you delay taking your pension while it continues to grow.

But exactly what is a deferred benefit pension and is it the right move?

This guide will tell you everything you need to know about the deferred benefit pension, the factors that affect its timeline and what common mistakes you have to avoid when you have to defer it.

Let’s get started.

What is a deferred benefit pension and how does it work?

What is a deferred benefit pension? If we put it simply, it’s exactly what it sounds like: you have a pension that you earned, but you decide to wait before collecting it. This could be your workplace pension, the state pension or your personal pension.

When you defer your pension, your money remains invested which may lead to a higher return in the future. Here’s how it works:

Accrued benefits

If you leave a job that provides a pension scheme (e.g., a defined benefit or final salary scheme), that pension is “deferred” until you decide to take it.

Growth potential

Your pension fund is still there so it can, therefore, be invested to give you a profit through stock market returns and/or the possibility of an increase guaranteed (very common in public sector schemes).

State pension deferral

If you hold off from claiming your state pension, it will be subject to an increase of 5.8% per year (as of 2023) for every year you defer it.

Workplace and personal pension deferral

Let’s give you an example here: imagine you are 67 now and you decide to continue with part time work and not touch your pension pot.

Your deferred workplace or personal pension grows by 3% per year. If you have a pot of say £200,000 and you defer it for 5 years, it’ll grow to £231,855, which means you’ll get an extra £31,855 towards your retirement.

Who is eligible for a deferred pension and how long can you defer for?

Most of the people are eligible to defer their pension but the rules vary by scheme:

Workplace pension

You can defer if you leave a job that comes with a pension.

Defined benefits (DB) systems are usually guaranteed and most of them have a normal retirement age, for instance, 65.

While defined contributions (DC) pots rely on investments, so if you defer your pension past 55, it’ll still keep growing.

State pension

You may defer it indefinitely but usually most people claim it by the age of 70.

Personal pension

Majority of personal pensions are eligible for deferral.

What factors affect when I can take my deferred pension benefits?

Once you have the answer to your burning question, “what is a deferred benefit pension?”, there are certain factors you need to keep in mind before you go for the deferred pension benefits.

Tax implications

If you withdraw after the age 55, only 25% is tax-free. The rest is taxable as income. 

Personal issues (e.g. health concerns)

If you have any personal financial issues that you can address with your pension, for example health concerns, you may want to take your pension earlier.

Market performance

DC pensions basically depend on the market trends and types of investments.

You can decide to take or defer your pension benefits as per the current trends. 

For example, if you defer your pension during a recession or a market crash, you might get back a lesser amount instead.

What are the advantages of deferring your pension?

Pension pots grow free from income tax and capital gains tax. Hence, the pension value will almost always increase with time.

The longer you defer your pension, the more time your investments get to grow, which means you’ll get higher annuity with age.

You will see a significant increase in returns after the first 5-10 years.

What are the disadvantages of deferring your pension?

Well, life’s unpredictable and you may not know how long you get to keep your pensions growing.

If you defer for a long time, there’s always a risk of your savings outliving you.

If your deferred pension catches a period during which the annual inflation rate is higher than the growth rate, market is volatile or there’s an ongoing recession, it could shrink your pension pot instead.

Get expert advice

Whether you want to get more income from your state pension or optimise your tax situation, deferring your pension gives you flexibility and a chance to grow your annual income significantly – but it’s not without its risks so use it wisely.

We at Regulated Advice are available round the clock to connect you with financial experts. So let the top professionals create a strategy to help your pension to grow like you want it to.

Let Regulated Advice match you with a financial advisor for expert advice.