Now, let’s answer the question on everyone’s mind: “What Does Deferred Pension Mean?” It’s a pension that you only take until much later in your life. If you wait longer before cashing in your savings, your potential retirement income could be higher.
You can boost your savings by delaying taking your pension. This can ensure a comfortable retirement. It’s very straightforward to defer your State Pension. However, check with your pension provider or workplace pension provider for more information.
Now that I have your attention, let’s start!
How to Defer Your Pension and Workplace Pension
Currently, it’s possible to withdraw money from your personal or workplace pensions1 when you’re 55 or older. Alternatively, you can put it off until you’re 60, or withdraw your pension with your State Pension2. If you do this, you have to defer your retirement.
Most of the modern workplace and personal pensions out there are defined contribution pensions. Meaning their value is based on the amount you pay into your pension and the performance of your investments. When deferring a defined contribution pension, your savings might potentially grow continually. How? By your money being invested for a more extended period.
What Can Deferring Do To You?
When deferring, you can either continue or stop paying money into your pension. If you choose to continue, you’ll also receive tax relief on your payment until you turn 75, or up to £40,000 annually (for the financial year of 2020/21). Your employer should continue paying you if you’re settling into your pension, and you meet the Auto-Enrolment criteria.
You might have a defined benefit or ‘final salary pension. If that’s you, check whether or not deferring your pension will stop any income guarantees or services you might get. For example, a guaranteed annuity rate or lump-sum payment when you retire. This pension type isn’t directly linked to your investment’s performance. Therefore, it isn’t likely that you’ll end up with a higher pension income if you defer your defined benefit pension.
You should know that:
Different pension plans and pension providers will have other deadlines and ruled if you want to defer your pension. Some ask for additional fees. It’ll be worth your while to contact your pension plan administrator. Find out more information long before you retire. Then you’ll have enough time to do all the steps correctly.
The Pros and Cons of Pension Deferral
Pension deferral is a flexible retirement savings option that allows employees to delay the start of their pension payments until either reaching an age defined by law (usually 65 years old) or retiring from work
The pros and cons of this are as follows
Pros: Deferring your pension has many benefits, including giving you more time to save money for retirement while still earning interest on those funds. This way, when it does come time to retire, you’ll have saved up enough so you don’t need as much income in order to live comfortably.
Cons: The main con of deferring is that you’ll have to pay taxes on the deferred amount when it’s withdrawn, which will result in a sizeable sum being taken out as income tax and possibly an additional penalty if you’re not yet at retirement age.
Deferring State Pension Explained
The State Pension age is 66 for men and women in the UK. Even though you won’t have access to it, you may delay it, or in other words, defer it. If you choose to do so, you’ll receive a more considerable income. The amount you would’ve gotten is based on this income, plus you’ll get interested as well. If you delay your State Pension, you could cash in a lump sum, depending on your age.
For every 9 weeks of deferring your State Pension², the amount will grow roughly 1% or 5.8% annually. For example, by deferring your State Pension for a year, your amount will grow per week (£175.20 to £185.32). If you’re 66 since the 6th of April 2016, you aren’t eligible for a lump-sum payment.
For you to be eligible for the new State Pension, you’ll have to pay National Insurance Contributions (payments have had to happen for a minimum of 10 years). And if you want your full pension, you’ll have to pay National Insurance Contributions for35 years. All this information can be seen online as well. And lastly, if you defer your pension, it’ll be suitable for your contribution record if you haven’t paid enough for National Insurance.
Transferring A Deferred Pension To A SIPP
If you have a Deferred Pension, it may be possible to transfer this into a SIPP. This is only an option if your company offers these facilities and many will not allow this as they want their employees’ pension savings to remain in the company’s scheme. It might also depend on whether the deferred pension has already been invested or not
Can I Cash In A Deferred Pension?
The answer is yes, you can. A small deferred pension can be exchanged for a once-off lump sum (trivial commutation lump sum). The ‘cash equivalent value’ is the value of your entire retirement.
What Are Deferred Benefits Pension?
A deferred member is someone who isn’t paying into their pension plan anymore but hasn’t received funds from their pension yet. Benefits are frozen for deferred pensioners. These benefits are annual increase even if you’re no longer employed.
Can I Take My Deferred Pension At 55?
You can always decide to take early payment of your deferred benefits from the age of 55. If you choose to do so before your Normal Pension Age, these benefits will be reduced normally to take account of their early payment. And, they also need to account for your pension having to pay out for longer then..
What Are Pension Schemes?
Simply put, pension scheme is a type of savings plan that’ll help you save for later life, like when you retire. It also has excellent tax treatment if you compare it to other forms of savings. Some workplaces run their own, and other people take out a personal pension plan. Others have both. It’s all up to you in the end.
Here’s the catch:
When you delay your pension or defer your pension, there are some benefits you’ll receive! Not bad, hey? It could grow your pension and save you money in the long haul.