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Deferring your company pension

Understand what the pros and cons of deferring your company pension are, and how you’d go about doing this.

In this article
Coronavirus (COVID-19) pensions update Can I delay when I take my company pension? Do I need to defer my workplace pension?
How do I defer my final salary pension? How do I defer my defined contribution pension? Should I defer my workplace pension?

Coronavirus (COVID-19) pensions update

 

The coronavirus pandemic has caused stock market panic. This can have a direct impact on the value of your pension.

You can find more of the latest updates and advice related to the COVID-19 outbreak over on our dedicated Which? coronavirus information hub.

Can I delay when I take my company pension?

You can take your pension early or late. The main reason for delaying taking your company pension (known as ‘deferring’) is to boost your retirement income. This applies to defined contribution pensions, rather than defined benefit and final salary pensions.

With a defined contribution pension, the kind that sees your savings invested in the stock market, the longer you leave your pension invested, the more you’ll build up.

This guide explains what happens if you do decide to delay receiving your company pension.

 

Do I need to defer my workplace pension?

Before you decide to defer your company pension, work out how much money you’ll have in retirement, which will tell you whether or not you’ll need to take the risk of deferral. You can do this by getting an idea of your current spending.

Take three months' worth of bank and credit card statements, payslips going back three months and three months' shopping receipts. Also remember to factor in one-off spending such as birthdays, Christmas, holidays and car repairs.

Now work out where you think you'll spend more once you’ve retired – because your situation is changing, so will your spending habits.

You’ll need to compare this with how much income you'll be getting in retirement (from private pensions, the state pension, benefits or savings), to find out if there are any shortfalls.

Which? carries out an annual survey to help you judge how much you might need to manage in retirement.

Households spent a shade under £2,250 a month, or around £27,000 a year, on average on essentials (£18,000 per year) and a few treats (an additional £9,000 a year) when we carried out research in 2019.

You’d need £42,000 a year if you include luxuries such as long-haul trips and a new car every five years.

Go further: How much will I need to retire? – get prepared for your retirement with our helpful guide.

How do I defer my final salary pension?

Final salary schemes (also known as defined benefit schemes) will usually have a ‘normal retirement age’ (the age at which you can start taking your pension), which is often 60 or 65.

The normal retirement age for public sector pensions will vary depending on the scheme you’re enrolled in, and when you joined it. 

As an example, the NHS pension scheme is divided into different groups, with most members falling under the ‘2015 section’. 

For these members, the normal retirement age will be the same as their state pension age. Other members remain under the older 1995 or 2008 sections; their normal retirement ages will be 60 and 65, respectively. 

Under the Teachers' Pensions Scheme , members in the final salary scheme will generally be able to access their benefits at 60 if they joined before 1 January 2007, or 65 if they joined after.

Your final salary (defined benefit) scheme may not allow you to defer claiming your pension, so check with your employer or scheme administrator first.

Some defined benefit schemes may do allow you to build up extra entitlement (meaning you'll eventually get a higher income) if you work beyond normal retirement age, but this depends on scheme rules and is not always the case.

You won’t be able to defer indefinitely. Most schemes will have an age, usually 75, by which time you‘ll need to access the benefits. 

How do I defer my defined contribution pension?

If you’re in a defined contribution pension, you can generally access your money at 55 (although this is changing to 57 by 2028). 

At this point, you’ll also be able to withdraw up to 25% of your pension tax-free.

However, some schemes will have a 'normal' or 'selected' retirement age and if you access your pension plan before this date, you may incur an early exit penalty.

There are some clear pros and cons around leaving your DC pension untouched:

Pros

  • Your pension will have more time to grow (if left untouched or placed into drawdown), meaning that you should end up with a higher retirement income.
  • If you carry on working, you’ll also continue to pay into the scheme, which means your fund will be bigger when you come to retire.
  • Annuity rates improve with age, so you’re likely to secure a bigger retirement income if you purchase your annuity later. You're no longer obliged to buy an annuity with your defined contribution pension.

Cons

  • Leaving your pension invested could mean it grows, but if the stock markets fall, so could your pension’s value.
  • Annuity rates may fall, meaning your larger pension pot could end up securing a lower income than it would have done otherwise.
  • You’ll miss out on retirement income during the time that you defer, and there’s still the possibility of running out of money if you take out too much, too soon or if your investments perform poorly.

Go further: Defined contribution and money purchase schemes – read more about these types of pensions in our handy guide.

Should I defer my workplace pension?

Whether or not you should defer your company pension depends on your situation.

If you have a good state pension or income from other sources and continue to pay into your workplace scheme, it could be worth deferring for the extra retirement income you’ll get from a DB or DC scheme. 

You can contact your pension company or scheme provider if you’re unaware of your selected retirement date or the scheme’s normal retirement date. 

The clear advantage of deferment is that your pension fund can continue to grow tax-free until you require it – generating more income once you start taking money out. Pension tax relief is also available on pension savings of up to £40,000 each year until age 75.

Go further: Your state pension and benefits – read our guidance on the state pension in one place 

However, poor investment conditions could mean that deferral isn’t worth it. Claiming your company pension at retirement age and then investing part of it in a savings account could mean you achieve more growth than if you deferred, without missing years of retirement income that you have to make back. Seek financial advice if you're unsure.

Go further: Financial advice explained – read our guide to picking a good financial adviser. 

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