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What Are the Pros and Cons of a Deferred Pension?

Gerelyn Terzo
By
Updated Feb 25, 2024
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The last thing that an employee would want after years of service at a company is to receive a pension benefit that is not enough to sustain retirement. Consequently, a deferred pension might be appropriate. A key benefit of deferring a pension payout 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 may 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 into the plan by the employee and the plan sponsor or employer, and the compensation of the plan member. If an employee chooses to work beyond the traditional retirement age in a region, thereby creating a deferred pension, the ongoing payments, known as annuity payments, will be larger. This is a consequence of a higher retirement age and a shorter period of time in which the benefit must be paid.

Upon retirement, a plan member has an option to receive a pension benefit in a lump sum or divided into ongoing annuity payments. In the event of a deferred pension, there could be additional financial benefits to taking a lump sum payment. Certain state-run public pensions may provide a financial reward for deferring benefits. Regional laws vary and change, but there is a reward in taking an annuity-style distribution, too. A certain percentage will be added to the payments for a deferred pension.

Administrative inconveniences tied to a deferred pension may be minor in comparison with earning a higher retirement income. Pension benefits are delayed when the paperwork is not submitted. There may be an age limit as to when a pension must finally be taken.

In addition to a plan member, or employee, deferring a pension, a plan sponsor, or employer, can defer pension contributions. Cash contributions are made by a plan sponsor in order to keep the funding level of a pension healthy. In the case of a public pension, say a state-run plan, a poor fiscal condition could be further damaged 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 pension installment, and eventually, the payment must be made.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Gerelyn Terzo
By Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in Mass Communication/Media Studies, she crafts compelling content for multiple publications, showcasing her deep understanding of various industries and her ability to effectively communicate complex topics to target audiences.
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Gerelyn Terzo
Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in...
Learn more
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