Deferring Your Non-State Pension

Some private pension schemes (see Non-State Pensions) will offer you the chance to keep your pension fund invested longer than you originally intended. Deferring your non-state pension may have a range of advantages, depending on the individual terms and conditions of your particular pension savings scheme. Some pension schemes will set an age limit, above which their members must draw their pension. Other pension schemes will finish automatically when you retire from paid work. It is worth enquiring as to the terms of your pension scheme, to assess what options are available to you, and which of these might be suitable for you. If you wish to defer taking your occupational pension (see Occupational Pensions), it is worth enquiring whether your employer will continue to make contributions to your pension fund if you do so. Some occupational pension schemes treat members with a deferred pension according to the same rules as current members; other schemes may allow you to continue contributing to the scheme but stop contributing themselves when you leave employment.

You usually leave your pension fund invested for a longer time if you defer drawing your pension. The longer your fund is invested, the more time it has to grow; your deferred pension fund will usually be larger than the fund you would have received initially. At the same time you may be able to negotiate lower administration charges from your scheme provider, so you will receive more of the money you have saved when you come to draw your pension. Some personal pension schemes also agree to increase your pension in line with inflation, if you defer your pension.

Other pension schemes may allow you to continue to be a member, and count these extra years of membership when calculating your pension, so that the amount of pension you are entitled to increases. For example, if you are a member of a pension scheme which offers you an annual pension of:

          number of years in scheme   x   accrual rate   x   final salary

the number of years you have been in the scheme will increase if you defer taking your pension, and thus your total pension fund will be greater on retirement.

For example, Rita is a member of a final salary scheme with an accrual rate of 1/60. She has been a member for thirty-seven years, and is retiring at sixty with a final salary of £40,000. If her pension were calculated now, she would be entitled to:

          37 x 1/60 x £40,000 = £24,667 of annual pension

However, Rita's husband is still working and her children are no longer at home. Rita is happy to defer her pension until her husband retires in five years. In five years, Rita's pension will be:

          42 x 1/60 x £40,000 = £28,000 of annual pension

Rita's pension has increased by £3,333 annually because she deferred it. Of course, it is important to consider the disadvantages as well as the advantages, and decide which option is the most lucrative for you. Rita now has £3,333 more annual pension than she would have done, but she has lost out on five years of receiving the lesser annual pension of £24,667. In total, Rita has lost out on £123,335 of pension. Rita will have to live for over thirty-seven years after she begins drawing her increased pension, to age 102, before the increased pension pays her more than her lost pension. It is unlikely Rita will live this long, and so it is a better idea for her to begin drawing her pension on retirement.

 

However, if Rita had only been a member of the pension scheme for five years, it would be a good idea for her to defer her pension. If her pension were calculated now, she would be entitled to: 

          5 x 1/60 x £40,000 = £3,333 of annual pension

 

 

Annual pensionreceived at current rate

Rita's Age	60	65	70	75
£3,333
Total pension received from pension scheme:		After 5 years £16,665	After 10 years £33,330	After 15 years £49,995

 

 

 
If Rita chooses to defer her pension however, in five years she will be entitled to receive:

          10 x 1/60 x £40,000 = £6,666 of annual pension

 

Rita's Age	60	65	70	75
Annual pension received at deferred rate		£6,666
Total pension received from pension scheme:			After 5 years £33,330	After 10 years £66,660

 

 

 
After five years, Rita will have received the same amount from her pension scheme as she would have done had she begun drawing the lesser pension ten years earlier. After ten years, Rita has received £16,665 extra from her pension scheme than she would have done after fifteen years drawing the lesser pension. Assuming that Rita lives beyond age seventy, deferring her personal pension is a better idea for her than drawing it on retirement.

It is a good idea to do the research on what your personal pension scheme offers its members, and then calculate whether this is a good offer for you based on your financial situation, the pension you lose out on and your life expectancy. Consult the pension scheme administrator, or an independent financial advisor, if you want a second opinion.