While working until your late-60s or early-70s may seem like a long way off on one hand, on the other it can have many benefits for your mental and physical wellbeing. It can also help boost your finances in later life, ensuring you’ll have enough money in retirement.
As it is, retirement ages are already increasing. By the end of 2020 the State Pension age for men and women will be 66, rising to 67 by 2028. And depending on when you hope to retire, that may already place you in your late-60s. You can currently access your workplace or personal pension around a decade earlier at 55, but this is rising too. From 2028 it’s expected that you’ll need to be 57 before you can take advantage of the pension freedoms.
Whether you decide to keep working as normal until then, work part-time or retire gradually, here are just six of the reasons why you should consider delaying taking your pension.
1. Your life expectancy is increasing
In 2017 ONS data revealed that today’s 65-year-olds could expect to live for a further 22.8 years. This means that pension savings will need to last over two decades from the age the State Pension kicks in and over three decades from the time workplace and personal pensions are accessible.
20-30 years is a long time to depend on your retirement income, especially if you haven’t saved enough during your working life. The longer you wait until you take your pensions, the longer you can expect them to last. You can check what your retirement income will be based on at different retirement ages by using our online pension calculator.
Pension Life Expectancy Tables
Thanks to a handy tool from the ONS, you can also calculate your life expectancy based on national averages. From there you’ll be able to get a better idea of how long your pension will need to last, and depending on your predicted life expectancy you might want to consider delaying taking your pension.
2. Your pension has longer to grow
Whether you decide to keep working and paying into your pension or simply leave your funds untouched for a few years once you’ve retired, keeping your pension invested for as long as possible can bring great benefits in the long-term. Compound interest, for example, accumulates over time and can turn a small savings pot into a significant amount when left untouched.
Plus, when you eventually come to access your pension, you’ll be able to get higher payments as it won’t have to last quite as long. If you want to give your savings even more time to increase in value, flexi-access drawdown could be a good option as you’ll be able to withdraw lump sums whenever you need them, while keeping the rest of your pension invested in a mixture of shares, cash and bonds.
Choosing to keep your pension invested can be particularly useful if you’re due to retire during an economic downturn and have seen your pension balance fall. Depending on your circumstances, you may decide to keep your savings invested until the markets recover and your balance improves.
3. You can maximise your investment potential before moving to safer assets
As you approach retirement some pension plans will automatically derisk your investments by switching the assets you invest in. Shares and commodities, for example, are closely linked to market performance and while they can make great investments early on in your career, they can become riskier the closer you get to retirement. If the markets were to take a sudden turn for the worse, your pension balance could be affected and there might not be enough time for it to recover before you retire.
But, if you plan to retire later, you may be able to maximise your investments for a few extra years. The switch to cash or fixed interest assets usually happens 5-10 years before retirement so you should contact your pension provider well in advance to see if they can adjust your investments.
PensionBee’s ‘tailored’ plan offers this, investing your money differently as you go through life and moving your money into safer assets as you approach retirement.
4. Your employer will keep topping up your pension
If you continue working your employer will usually be required by law to keep topping up your pension through Auto Enrolment. As of April this year you’ll need to make a minimum contribution of 3% of your annual salary, while your employer pays in at least 2%.
This is set to increase in April 2019, rising to 5% employee contributions and 3% employer contributions. That means for every extra year you continue working from 2019 you can get an extra 3% of your salary added to your workplace pension by your employer.
5. You’ll continue to receive tax relief on pension contributions until age 75
If you keep paying the minimum amount into your pension, in addition to employer contributions you’ll also continue to receive tax relief. For the last few tax years workers have been entitled to claim tax relief on pension contributions up to £40,000 or 100% of their annual earnings.
Your tax relief is related to the income tax you pay
Your tax relief is related to the income tax you pay. Basic rate taxpayers get tax top ups of 25%, which means that for every £100 they pay into their pensions HMRC effectively adds another £25. Higher rate taxpayers can claim a further 20% through their tax returns, and top rate taxpayers can claim 25%.
6. Delaying your state pension can boost your payments
As the State Pension can’t usually be taken until around a decade after your workplace or personal pension becomes available, there’s a chance that you might not need it when the time comes. If you have retirement income coming from other sources or are still working, it could be a good idea to defer your State Pension.
Delaying your State Pension by just a few weeks could result in you receiving a higher weekly State Pension amount, or even a lump sum payment. The amount you’ll qualify for depends on when you reach State Pension age.
If you reached State Pension age before 6 April 2016
Your State Pension will increase by around 1% for every 5 weeks you defer, totalling 10.4% for every full year. For 2018/19, the basic State Pension is £125.95 a week or £6,549.40 a year. If you delay taking your pension for just one year your State Pension will rise to £139.05 a week, or £7,230.60 a year.
If you reached State Pension age before 6 April 2016 you could qualify for a lump sum payment if you start claiming State Pension after deferring for a minimum of 12 months. That means you could take a lump sum of around £6,639 (calculated on a base rate of 0.5%), when you defer the basic State Pension of £125.95 a week for a year.
If you reached State Pension age after 6 April 2016
If you’ve reached State Pension age relatively recently, you’ll see less of an increase as the new State Pension is already higher than the basic State Pension amount referenced above. Your State Pension will increase by around 1% for every 9 weeks you defer, totalling 5.8% for every full year.
If you receive the new State Pension of £164.35 a week or £8,546.20 a year in 2018/19, your pension will rise to £173.89 a week, or £9,041.88 a year when you defer taking your pension for a year. If you’ve reached State Pension age after 6 April 2016 you won’t be eligible for a lump sum payment.
If you receive housing benefit or pension credit, it’s worth noting that these benefits may be affected by any additional pension income. But, if you reached State Pension age before 6 April 2016 and qualify for a lump-sum payment, your benefits won’t be affected.
How long can I defer my state pension?
You can start deferring your pension even if you’ve already started drawing it and can choose to defer it for as long as you want.
Remember, if you reached State Pension age before 6 April 2016 and delay taking your pension for a minimum of 12 months you could take a lump sum of around £6,639.
If you’re nearing retirement and are thinking about keeping your workplace or personal pension pot invested, it’s a good idea to speak with your pension provider as soon as possible. Some pension schemes may have restrictions or impose fines if you change your retirement date, while others may not offer it as an option. If this is the case you might want to consider switching to another scheme or pension provider that’s more flexible.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.