Delay taking your pension

Although delaying taking your pension might feel strange, after all you have probably saved diligently for years, it can be the right thing to do and is certainly an option which should be considered.

Sometimes, pension benefits are taken simply because people think there is no other option. People are often still healthy and active at retirement age, and may actually want, or indeed need, to continue to work.

It is also often possible to delay taking benefits from your pension pot and use other investments or income sources to meet your expenditure. Of course, this could reduce your capital, especially if the income you take is greater than the growth or interest received. It is therefore important to carefully consider your investment strategy in deferment to ensure the fund is not exposed to inappropriate risk.

Should you die before age 75 and you have not taken an income and / or tax-free lump sum, your fund is classed as ‘uncrystallised’ and can generally be passed to your spouse or partner without deduction of tax.

The rules on death after the age of 75 have recently changed, the diagram below explains more:

Death benefits flow chart

There are a several advantages to delaying taking money from your pension pot:

  • The money in your pension remains invested in a tax-efficient environment
  • Annuity rates generally increase the older you get, although this rise can sometimes be outweighed by falls in the general level of Annuity rates
  • If you plan to buy an Annuity, deferring the purchase may allow you to qualify for an Enhanced Annuity if you start to suffer from ill health
  • An alternative income stream, perhaps from other investments, may provide a more tax efficient income
  • Means-tested state benefits may still be available
  • Usually, your pension assets are outside of your estate for Inheritance Tax purposes

As you would expect, there are a number of disadvantages to deferment:

  • Future Annuity rates cannot be guaranteed and may have fallen by the time you come to buy an Annuity, of course the reverse could also be true
  • You will not receive the benefit of the income stream that would otherwise have been created
  • If the fund remains invested in higher risk investments, the value could fall
  • Inflation could start to erode the value of your fund if returns do not keep pace with rising prices
  • Delaying taking pension benefits may mean other capital must be used to provide an income. This capital may be in equally tax efficient investments such as ISAs (Individual Savings Accounts)