Deferring a pension can increase retirement benefits, but may delay retirement. Pension benefits are based on years of service, contributions, and compensation. Deferred pensions can be received as a lump sum or annuity payments, with potential financial benefits for both options. Employers can also defer pension contributions, but this may have consequences for the pension’s funding level.
The last thing an employee would want after years of service with a company is to receive a pension benefit that is not enough to support retirement. Consequently, a deferred pension might be appropriate. A key benefit of deferring a pension payment is that the extra time allows the total retirement benefit to grow. The main setback is probably not being able to retire at the age that could have been planned.
A pension benefit is based on a calculation using the total number of years an employee served, the amount of money contributed to the plan by the employee and the plan sponsor or employer, and the plan member’s compensation. If an employee chooses to work beyond the traditional retirement age in a region, thus creating a deferred pension, ongoing payments, known as annuity payments, will be higher. This is a consequence of a higher retirement age and a shorter period of time in which the benefit must be paid.
At retirement, a plan member has the option of receiving a pension benefit in a lump sum or divided into ongoing annuity payments. In the case of a deferred pension, there could be additional financial benefits to taking a lump sum. Certain state public pensions may provide a financial reward for deferring benefits. Regional laws vary and change, but there is also a payoff in taking an annuity-style distribution. A certain percentage will be added to the payments of a deferred pension.
The administrative inconveniences associated with a deferred pension may be minor compared to earning a higher retirement income. Pension benefits are delayed when documentation is not submitted. There may be an age limit as to when a pension must be taken.
In addition to a plan member or employee, deferring a pension, a plan sponsor or employer may defer pension contributions. Cash contributions are made by a plan sponsor to keep the funding level of a pension healthy. In the case of a public pension, say a state-administered plan, poor fiscal condition could be further affected and have greater consequences. If there is legislative approval, this form of deferred pension would allow the state to defer making contributions for a period of time so that the money can be used elsewhere. The state remains on the hook for the installation of the pension, and eventually, the payment must be made.
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