The pension funds your clients save are designed to provide them with an income in later life.
However, perhaps counter-intuitively, if your client is planning a phased retirement or they have other savings to draw on when they retire, they could benefit from deferring drawing from their pension.
There’s no obligation for an individual to claim their State Pension as soon as they reach State Pension Age. Similarly, while it’s often possible to access a workplace or personal pension from the age of 55 (rising to 57 from 6 April 2028), your client could opt to take their pension later.
And, for higher earners, the removal of the Lifetime Allowance (LTA) from 6 April 2024, might make pensions a more attractive way to save for the future. With no tax consequences for exceeding the LTA – unless your client takes a significant lump sum – they may be more motivated to give their pension the opportunity to grow further and potentially provide a higher income in the future.
Read on to learn five reasons your clients might want to delay taking their pension when they retire.
1. Your client’s retirement could last 20 years or more
According to the Office for National Statistics’ life expectancy calculator, on average, a man aged 55 will live to age 84, while a woman aged 55 will live to age 87.
This means that your client may need to have enough savings to cover more than 30 years of retirement.
So, if they can afford to live comfortably on other sources of income when they retire, deferring their pension could leave them a savings pot to draw on later in life.
2. Their pension could continue to grow
If your client delays drawing on their pension, their funds will have the potential to continue growing until they need to access them.
Compounding can be particularly valuable for pension savers as it works best when money is left invested and untouched. By reinvesting any returns made on investments – rather than taking it as income – small amounts of money could grow into large amounts over time.
However, it might be worth reminding your client to check the terms of their pension scheme to ensure that they understand what will happen to their investments as they approach retirement age.
If their pension provider employs a “lifestyling” investment strategy, their savings may gradually be moved to lower-risk funds as they get closer to retirement. While this could help to protect their savings from fluctuations in the market, it might also mean that your client misses out on many years of potential growth during later life.
3. They could receive higher payments
Delaying taking a workplace pension means your client may have fewer years to draw on it, so they could receive higher payments.
However, it might be wise for them to check their policy details, as some pension providers won’t allow members to delay their retirement date, or they might charge additional fees for deferring.
Deferring a State Pension could also result in higher weekly payments or a lump sum. The amount your client qualifies for will depend on their State Pension Age.
For example, if a client reaches State Pension Age after 6 April 2016, their State Pension will increase by the equivalent of 1% for every nine weeks they defer (provided they defer for at least nine weeks).
4. They could continue benefiting from their full Annual Allowance
Once your client begins to flexibly draw an income from their defined contribution (DC) pension, they may be affected by the Money Purchase Annual Allowance (MPAA), which limits tax relief on future contributions to ÂŁ10,000 (2023/24).
In contrast, leaving their pension untouched could allow your client to continue benefiting from the full Annual Allowance of ÂŁ60,000 (2023/24) (although if they are a higher earner, their Annual Allowance may be lower).
If your client wants to continue making contributions to their pension from earnings, they could benefit from this generous tax relief until the age of 75, provided they don’t trigger the MPAA. So, deferring drawing an income flexibly could enable them to build up a bigger fund.
5. They could pass their pension on without beneficiaries incurring Inheritance Tax
If your client has other sources of income to rely on in early retirement, leaving their pension pots untouched could give them longer to decide how to make the best use of these savings.
If they can afford a comfortable retirement without dipping into their pension, your client might wish to pass their savings on to loved ones.
As pension funds usually fall outside an estate for Inheritance Tax (IHT) purposes, this could be a tax-efficient way to pass on their wealth.
So, your client might choose to spend their other assets first – namely those that will normally fall into their estate for IHT purposes – and preserve their pension as long as possible.
Get in touch
If your client would like help reviewing their pension and planning for their retirement, we’d love to hear from them.
Please email us at mail@delaunaywealth.com or call 0345 505 3500.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.