What is a deferred pension plan?

A deferred pension plan is a retirement plan that allows you to defer withdrawals later than the point at which you are entitled to do so. Although most people start taking their pension when they are eligible, some choose to defer payment for various reasons.​

With the state pension, personal pensions and most workplace pensions you can defer payment. You can defer one or more, or none; the choice is yours.

In this article, we will cover what pension plans you can defer, how and why you might choose this option, the benefits, and potential risks.

Why defer a pension plan?

There are two principal reasons to defer a pension plan.

• You want your future income to be higher.
• You do not need the income at present.

 

One or both may apply to you. Also, if you already have an income, you may increase your tax burden by drawing on your pension. As such, if your income is sufficient, you may defer your pension until such time as your earnings drop or stop.

Can you defer the state pension?

The state pension becomes payable after your official State pension age.

The state pension age was sixty-five, but this has changed. Currently, it is sixty-six and rising to 67 in 2028.

If you choose to defer your state pension, it will result in a higher income.

How to defer the state pension.

About two months before you reach state pension age, you will receive a letter inviting you to claim it. If you wish to defer your pension, ignore this letter. However, keep it for future reference.

You can find further information on how to claim your deferred state pension on the government website. How much you receive for deferring your pension will depend on whether you reached state pension age before 6 April 2016 or later.

• State pension age before 6 April 2016.

If you can claim your state pension before 6 April 2016, you will receive the old state pension. You may also qualify for the additional state pension. If you choose to defer, your payment will increase by 1% for every 5 weeks you defer.

Furthermore, you can take the deferred portion as a lump-sum payment. This option is not available with the new state pension.

If you are in the old state pension, the DWP will contact you to ask how you wish to receive the deferred payment: either as a lump sum or increased weekly payments. If you take the lump sum option, it is of all your deferred payments plus 2% interest above the Bank of England base rate.

• State pension age after 6 April 2016.

You will receive the new state pension if you reach the age of sixty-five after 6 April 2016. The maximum amount is currently £230.25 per week for the 2025/26 tax year. For every nine weeks you defer, it will increase by 1%. As such, if you defer for an entire year, the payment will increase by 5.8% to around £243 a week.

Does the value of the state pension increase if I defer it?

Both the new and old state pensions will increase in value the longer you leave them. Also, you still benefit from any increase in the state pension. Because of the state pension triple lock, your pension will increase each year at least in line with inflation. You will not miss out if you defer your state pension. Deferred payments include any increases.

Can you defer a personal or workplace pension?

If you have a personal pension or a workplace pension (normally defined contributions), you can access your pension at any time from age 55. However, this rises to fifty-seven from 2028.

You may not want to retire that early, or you may not be able to afford it at all. The choice is yours from age 55, but by choosing not to access your pension until later, you are not really deferring payments; you are just leaving it for later.

Why defer payment from a pension plan?

A pension pot is basically a sum of money to provide you with an income in retirement. The idea is that the sum of money lasts throughout your retirement. As such, it is a good idea to hold on to it for as long as possible, giving it time to grow in value. Furthermore, when you start to draw an income, you should aim to make it last as long as possible.

You can continue to fund a pension and receive tax relief on your contributions until you are seventy-five. Also, you can continue to receive employers' contributions even if you are not making any payments. As such, the fund can continue to grow.

There are advantages to deferring your pension. This applies whether you take an annuity or use a drawdown facility.

• Drawdown: By delaying any withdrawals, you give the pension pot more time to grow, increasing the likelihood that the funds will last into an older age. You need to plan your withdrawals with care because any made will cause the pot to decrease in value faster.
• Annuity: An annuity is likely to be higher the older you are when started. Other factors can also influence the level of payment, such as, health issues. As such, by deferring, you could increase the payments you receive.

 

Is Inheritance tax a reason to defer a pension plan?

Currently, pension pots are not subject to inheritance tax. As such, pensions are an excellent tool for tax planning purposes. Many people use their capital to increase their retirement income and leave their pension pots untouched for as long as possible. By doing so, their heirs may inherit more. However, this changes from April 2027. From this date, inheritance tax will apply to unspent pension pots.

This is a massive change and could mean your heirs could end up paying 40% inheritance tax on your unspent pension pots. This will depend on the value of your other assets and allowances.

Due to the changes, it is essential to get expert advice from a financial advisor or tax specialist.

Can you defer a final salary pension plan?

The simple answer to this question is yes, but there may be no benefit in doing so. By deferring this type of pension plan, you will not increase the payments you are due. As such, all you would be doing is missing out on payments.

Your options may include.

• When you reach retirement age, take the money.
• Working for longer.
• Transferring your pension to a defined contribution plan. However, you will need to take financial advice if you take this option.

 

Are there any risks in deferring my pension plan?

Certain pensions have built-in guarantees that can only be taken at a particular retirement age. Also, some guarantees must be taken on a specific date. A guaranteed annuity rate is an example of this, allowing you to purchase an annuity at a preferential rate.

This type of guarantee can significantly increase your retirement income, so it is worth checking whether your pension has any such guarantees built in. This is particularly relevant to older pensions from the 80s and 90s. If you defer these types of pensions, you may miss out on some valuable benefits.

The uncertainty of the future is the only other real risk of deferring your pension. When purchasing an annuity, it makes sense to do so when the stock market is strong. By deferring your pension, the stock market may fall and have an adverse effect on your income. However, the opposite is also true. If the stock market is low, deferring your pension until the market recovers could increase your income.

Summary

Deferring your pension plan can carry certain risks. These include missing out on guaranteed annuity rates and exposing your money to market fluctuations. However, by deferring, your pension can maximise its growth potential. As a result, you will have more money and security in your retirement years.

There are certainly many factors to consider, and every case is different. Some points to consider are.

• Do you have sufficient income at present?
• Are you going to continue working beyond state retirement age?
• Will you need a higher income later in life?
• The rule changes on inheritance tax.
• Health issues.
• Will an extra income increase your tax threshold?

 

A financial advisor can help you through the entire process and help you make an informed decision. In 2024, we connected more than 12,000 clients with financial advisors. We have over 250 advisors listed, covering every city in the UK. As such, we usually find an advisor close to you. They can assist you with every aspect of financial advice. Furthermore, all the advisors are authorised and regulated by the FCA. So, finding a local advisor could not be easier than at Regulated Advice.