What is a deferred pension?
What is a deferred pension, and how can it be beneficial to defer your pension? If you’re asking yourself these questions, then this guide should be a great help. Find out what a deferred pension is, how it works and how you can claim it.
Just before you reach state pension age, you’ll be notified about claiming your state pension. Not ready to claim it just yet? Well, that’s called deferring your pension.
A deferred pension is essentially just a state pension that hasn’t been claimed yet. This will occur automatically when you decide not to take your pension when reaching state pension age.
Why would you defer your pension?
Some people choose to defer their state pension as it could increase the payments made when the pension is claimed. Therefore, a deferred pension can lead to a more substantial pension and offer slightly more comfort if you’re worried about retirement.
What will I get if I defer my pension?
What you’ll get is dependent on when you reached state pension age.
If you reached state pension age on or after 6th April 2016:
- Your state pension amount will increase every week you defer, but only as long as you defer for nine weeks at least.
- Your pension will increase by around 1% for each nine-week period you defer. This equates to about 5.8% over a year.
- This extra amount is paid with your state pension payment
If you reached state pension age before 6th April 2016:
- You can receive your extra state pension as weekly payments, or as a lump sum.
- Your regular state pension will increase by around 1% for every five weeks you defer. This amount is paid with your state pension.
- You can receive a lump sum payment if you defer for at least 12 months. You will be taxed on this.
- You’ll have three months from the date you claimed your deferred state pension to decide how to take your pension. You’ll be sent a letter to communicate this.
Are there any limits to deferring your pension?
You can’t build up additional state pension if you receive:
- Income support
- Pension credit
- Employment and Support Allowance
- Jobseeker’s Allowance
- Carer’s Allowance
- Incapacity benefit
- Universal Credit
- Severe Disability Allowance
- Widow’s Pension
- Widowed Parent’s Allowance
Taking greater weekly payments from your state pension would reduce the amount you received from some of these benefits. If you receive Housing Benefit, tax credits or Council Tax Reduction, these could also be reduced.
If you want to know more about how your benefits may be affected by a deferred pension, contact Jobcentre Plus. You can visit the gov.uk website to learn how to do this.
Claiming your deferred pension
You can claim your deferred state pension online, by phone or by post if you’ve deferred your pension for a year or less.
Claiming online? You can do this easily through the gov.uk website. This is the quickest way to claim your deferred pension.
Claiming by phone? Call the Pension Service on 0800 731 7898.
If you’ve deferred your pension for more than a year, you’ll need to call the Pension Service to claim.
What if I’ve moved abroad?
If you’ve moved to a European Economic Area (EEA) or a country that has a social security agreement with the UK, the rules remain the same for deferring your pension.
However, suppose you reach state pension age after the 6th April 2016 and move to a country that isn’t mentioned above. In that case, your extra payment is based on the state pension you’re owed from whichever happened later – moving abroad or reaching state pension age. The government has further guidance for claiming state pension if you’ve retired abroad which you can find here.
Inheriting a deferred pension
You’ll be able to inherit your spouse’s/partner’s extra state pension if you meet the same criteria needed to inherit their regular state pension. Take a look at our guidance on ‘What happens to your pension when you die?’ to learn more about this criteria.
If your partner passed away before claiming their deferred state pension, you can usually inherit this as a lump sum or as weekly payments if they died after deferring their pension for a year or more.
If they deferred for 5 weeks to a year, you’d inherit this through weekly payments. If it was less than 5 weeks, their state pension for those few weeks will become part of their overall estate.
Deferring a workplace or private pension
So, with a workplace pension or private (personal) pension, you can begin withdrawing money from this type of pension pot from the age of 55. If you’d like to wait a bit longer, say until you reached state pension age, you’ll have to defer it.
Deferring your workplace or private pension has the potential to increase the total amount in the pension as your money is being invested for longer (this is the case for defined contribution pensions but not for defined benefit pensions).
The choice is yours – when you defer your pension, you can decide to continue to pay into it or not. If you continue paying into your pension, you can continue receiving tax relief on these payments until the age of 75 and up to £40,000 a year.
It’s best practice to communicate with your workplace or private pension provider to find out more about deferring your pension and whether this will be beneficial to you.