With the State Pension age, life expectancy and the cost of living rising in the UK, it’s important to look at ways you might be able to maximise the potential of your retirement savings.
This could mean delaying taking money from your pension beyond retirement age, if you can afford to. Besides, you may not be ready to stop working at that point anyway, or might prefer to go part-time before you retire fully.
Of course, deferring taking your pension is a very personal decision and whether it’s right for you will depend on your individual circumstances. You’ll need to carefully consider the tax implications and think about how long you want to spend in retirement, among other factors, to help you decide if it’s worth doing.
Here, we look at some of the reasons why you might want to delay taking your personal, workplace and State pension pensions, the impact doing so might have on your retirement income, and how to go about it.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Contents
- Your pension probably needs to last for decades
- You could defer your State Pension to increase the amount
- You may be able to increase your pension’s investment potential
- You have longer to pay into your pension if you defer taking it
- You can continue to receive tax relief on contributions until age 75
- Your employer will continue to contribute to your pension (if you are still working)
- Your pension won’t need to last as long if you defer taking it
- More time to decide on the right option for you
1. Your pension probably needs to last for decades
According to the latest figures from the Office for National Statistics (ONS), average life expectancy in the UK from the age of 65 is about 19 years for a man and 21 years for a woman.
This means that based on the current State Pension age of 66 (rising to 67 between 2026 and 2028), your retirement savings will usually need to last for around two decades at least, and your workplace and personal pensions three decades, as you can dip into these earlier.
Under current rules, you can generally access defined contribution pensions once you reach the age of 55 (rising to 57 in 2028). The length of time your pension needs to last means that many people may benefit from waiting to take their pension, so they can increase their savings if possible and ensure there is sufficient money to last the rest of their lives. You can learn more about how defined contribution pensions work in our guide What is a defined contribution pension?
If you have a final salary or defined benefit pension, your retirement age will usually be 65, which is when your employer stops contributing to your pension and you can start to receive an income from it.
You are able to calculate your life expectancy, based on national averages, using this tool from the ONS, although bear in mind that your actual life expectancy will depend on your health and personal circumstances.
2. You could defer your State Pension to increase the amount you get
You can currently start claiming your State Pension from the age of 66, and you may do so while continuing to work. However, you might choose to delay taking your State Pension if you don’t need the income, in order to receive a greater amount at a later date.
The government will increase your State Pension payments by 1% for every nine weeks you defer, which works out at around 5.8% a year. You will receive an extra £12.83 a week income by deferring your State Pension for 52 weeks, for example. You may want to consider doing this if you’re continuing to work, or have other income sources such as money in individual.
You may also think about dipping into your defined contribution pension pot from age 55 to supplement your income, while you carry on working, although remember this will reduce the amount you have to live on when you retire. Read more in our article Should I use my pension to boost my income?.
It’s also sensible to get a State Pension Forecast to see how much you can expect to receive at retirement age. If there are gaps in your National Insurance record, you may want to continue working to increase the amount you receive anyway.
However, whether to delay claiming your State Pension or not should be a carefully considered decision. It may not be a suitable option for you if you suffer from ill health, for example. Read more in our articles Deferring State Pension – How much can I get and is it worth it? and How the State Pension works.
3. You may be able to increase your pension’s investment potential
The longer your pension remains invested, the more time it has to potentially grow in value and produce a larger retirement income when the time comes. There are no guarantees, however, and there’s a chance you could end up with less than you put in, so it’s important to understand the risks involved. Find out more in our guide Investing – the basics. The longer you stay invested, the more time compounding has to work its magic, which is simply when your returns (which are left invested) also generate returns.
You may be able to maximise returns by investing in a broad mix of investments, before switching a greater proportion of your money into less risky investment investments such as government bonds and cash. If you’ve chosen your pension’s ‘default fund’ this will usually happen automatically as you approach retirement to reduce the risk of your pension suddenly falling in value when you need the money.
However, if you’re planning to retire later, you may decide not to move into less risky investments until later on. It’s a good idea to seek professional advice on the investment options available to you, so you can be certain you’ve made the right choices to suit your needs based on your investment timeframe and your approach to risk. Read more in our article Where is my pension invested?
4. You have longer to pay into your pension if you defer taking it
You’re able to continue paying into your pension beyond retirement age, and receive tax relief on your contributions. Doing so may hopefully mean you end up with a bigger pension to live on when you eventually stop work.
Bear in mind that the maximum you can pay into your pension is £60,000 a year, or 100% of your annual earnings. This is known as the Annual Allowance, and remains at this level unless you start taking money from your pension. Once you’ve started taking money out of your defined contribution pension, your Annual Allowance falls to £10,000, known as the Money Purchase Annual Allowance (MPAA). However, you can take a 25% tax-free lump sum out of your pension without impacting your Annual Allowance. Read more in our articles How do pension allowances work? and What is the Money Purchase Annual Allowance?
5. You can continue to receive tax relief on contributions until age 75
One of the best things about paying into a pension is the tax relief you get on your contributions, and you can continue to benefit from this right up until you reach the age of 75.
The amount you’ll receive depends on which income tax bracket you fall into. Most UK taxpayers automatically get tax relief on pension contributions at the basic rate of tax which is 20%. So, if you wanted to add £100 to your pension, you’d only need to pay in £80, as the government would add the £20 it took in income tax.
Higher rate taxpayers can claim back a further 20% in relief via their tax return, while additional rate taxpayers can claim an extra 25%. Find out more about pension tax relief in our article How pension tax relief works and How do I reclaim higher rate pension tax relief?
6. Your employer will continue to contribute to your pension (if you are still working)
Your employer is required to pay into your workplace pension under the government’s auto-enrolment rules, so if they agree to you continuing to work past retirement age, both they and you need to keep paying in.
Under auto-enrolment rules, you need to make a minimum contribution of 5% of your salary, while your employer must contribute at least 3% of your salary. Employer contributions can be thought of as effectively a pay rise that you receive at retirement, so it’s well worth making the most of them. Some employers will pay more in than the minimum contribution, and you can also pay more in if you want to. Find out more about auto-enrolment in our guide How does pension auto-enrolment work?
7. Your pension won’t need to last as long if you defer taking it
If you defer your pension, when you come to access your savings, you should be able to take a higher level of income from it, as your retirement pot won’t have to last as long as if, say, you’d started taking money from it five years earlier.
If you’re not sure the impact deferring your pension could have, there are several pension calculators available that can help you plan for retirement and see the impact of changing your retirement date.
You may be able to potentially maximise your savings by using a flexible drawdown plan, taking as much income as you need from your pension, whilst leaving your retirement savings invested. You can usually move your pension into a flexible drawdown plan from age 55 and decide how and when you take an income from this. Find out more in our articles What is pension drawdown and how does it work? and Your pension options at retirement.
8. More time to decide on the right option for you
Delaying taking your pension gives you more time to plan ahead and decide when and how you want to receive your retirement income. Even if you don’t plan to take your pension for many years, it’s sensible to review your pensions now so you can consider your options, and work out how much you need to save for the retirement you want.
The right choice for you at retirement will be entirely based on your income goals and personal circumstances. It’s usually extremely beneficial to seek professional advice or guidance to understand your options.
The Government’s Pension Wise service provides people aged 50 and above with free guidance on their pension choices at retirement. However, if you want advice based on your situation and savings, you’ll need professional financial advice.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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