Deferred State Pension Calculation

uk1

Question about the deferred state pension calculation.

Does the increase of 10.4% for each years deferral apply to the original state pension at normal retirement age or is it applied to each new pension payment each time pensions are annually increased? So does the state pension inflation increase and deferral increase compound side by side?:)

To illustrate my question using simple example (I only do simple!) - if my state pension is £100 per week when I start the deferral and the month the state increases the pension is exactly the same month of my anniversary of deferral, then in year two of the deferral is the calculation:

Old Pension: £100 weekly.
New pension after 1 years deferral(ie +10.4%): £110.40
Pension state increase +5%: £116.03

So base pension carried to Year 3 for increase calc is £116.03?

Therefore Year 3 would be:

Old Pension: £116.03 weekly.
New pension after 1 years deferral(ie +10.4%): £128.09
Pension state increase +5%: £134.50

So does this mean my eventual pension is the sum of each annual calculation or is it simply the original pension compounded by 10.4% for each years deferral?

My question sounds complex so I hope someone who understand these things can confirm if I have understood the calculation correctly please? Seems very generous if I have.

mjm3346

I believe the method of calculation in this is still current.

http://www.direct.gov.uk/prod_consum_dg/groups/dg_general/@dg/@en/@over50/documents/digitalasset/dg_180189.pdf

You earn an extra 1% for each 5 weeks you delay claiming, this is added to the value of the pension when you claim it, there is no "compounding".

If you left it 5 years you would add 52% to whatever the pension is in 5 years time.

dzug1

The example given here:

http://www.pensionsadvisoryservice.org.uk/state-pensions/deferring

implies it's not compounded.

uk1

Many thanks - yes I had read the examples but the example seems to ignore and not mention increases anywhere. This means you do not know what base number to take in the left hand column of the spreadsheet. It could be taken either way - and I'm not confident the telephone help line will provide anyone who would understand the question let alone provide a reliable answer!

If you take the spreadsheet version my question is where it says weekly state pension in the left hand column, is the appropriate number the new increased pension each year ie the old pension plus the deferral increases plus the inflation increase.

From what I can see that question isn't covered either in the explanation or the spreadsheet hence my question. It would seem wrong to freeze the pension calc at the state pension age at normal retirement because the 10.4% increase isn't the real increase - it would be 10.4% minus the compounded annual state pension increase.

mjm3346

uk1 wrote: »

Many thanks - yes I had read the examples but the example seems to ignore and not mention increases anywhere. This means you do not know what base number to take in the left hand column of the spreadsheet. It could be taken either way - and I'm not confident the telephone help line will provide anyone who would understand the question let alone provide a reliable answer!

If you take the spreadsheet version my question is where it says weekly state pension in the left hand column, is the appropriate number the new increased pension each year ie the old pension plus the deferral increases plus the inflation increase.

From what I can see that question isn't covered either in the explanation or the spreadsheet hence my question. It would seem wrong to freeze the pension calc at the state pension age at normal retirement because the 10.4% increase isn't the real increase - it would be 10.4% minus the compounded annual state pension increase.

The 1% increase for every 5 weeks is not compounded.
Whatever increase you get, say 10.4% is applied to the state pension when you draw it, that is the basic state pension in force at the time you claim it not the pension in place when you defer it.

This is for taking it as an additional pension not the lump sum.

mjm3346

For the lump sum the pension is increased as it goes along (the same thing as adding the pension increase to the pension at the end and not the beginning for those taking the weekly increase)

But instead of adding £100 State Pension each week we add the new amount of £102.70
From that date we continue to add interest at 0.1212% but we add the amount of State Pension each week which is now £105.30

uk1

mjm3346 wrote: »

The 1% increase for every 5 weeks is not compounded.
Whatever increase you get, say 10.4% is applied to the state pension when you draw it, that is the basic state pension in force at the time you claim it not the pension in place when you defer it.

This is for taking it as an additional pension not the lump sum.

Many thanks .... I think I'm begining to understand it now.

So in order to understand "the offer" - you place in the left hand column what you "predict" will be the state pension for you when you actually retire after it had been inflated each year by the government's increases.

So in almost laymens terms - for example - if the current pension is £5000 per year now but you " believe" it will be increased by say 4% per year and you defer by say 5 years then the starting pension for the calculation in 5 years time ("the left hand column in the spreadsheet") is £5849 (£5000 compounded by 4% for five years) ... and then you apply the 10.4% for five years .... so that would give a pension of £8891?

So in my scenario, I can (or more accutely me wife can) either have a pension of £5000 per year now for life or £8891 a year for life if I defer for 5 years if pensions increase by 4% per year.

My calculations clearly test a saint but I'd appreciate a view as to whether I have the principles correct.

mjm3346

Thats what I work the numbers out to be.


Although the figures are correct I am not sure that is a good way of looking at it. Apply the 52% (10.4%*5) to £5000 gives £7600 which is a better reflection of the "worth", in 5 years time £8891 is not going to buy anymore than £7600 does now (probably less)

uk1

mjm3346 wrote: »

Thats what I work the numbers out to be.


Although the figures are correct I am not sure that is a good way of looking at it. Apply the 52% (10.4%*5) to £5000 gives £7600 which is a better reflection of the "worth", in 5 years time £8891 is not going to buy anymore than £7600 does now (probably less)

Thanks - a very worthy reminder.

I'm in the fortunate postition (wife and I are both 60 - neither can believe it ....... I still fancy her ...... but that's enough smut) that we built a business and have some cash and a couple of properties - neither rented out - neither mortgaged - and do not need the state pension now or for the forseeable future. I have very unusual attitude to investments. Everything currently in cash .... moved into cash at roughly the right time and when everyone else told me I was wrong (teee hee) and my current cash deposit portfolio which wasoriginally placed into 1 to 5 year depost accounts and is therefore currently earning across the lot 4.85%. Some tax free as it's in long-term ISAs bought when you could get 6%+. What also makes my attitudes strange is that I see our assets (excluding our main house) as sinking funds rather than investments that must be preserved ie I sink them presuming neither of us will be here from ages say 90 rather than simply living on interest. We also have some "occupational" pensions. This currently means that we won't run out of cash until we're 85 or so ... and then we could if heve nothing else use property equity. But we'd also have our pensions and state pensions.

The state pension dates will be hers in Q1/2011 and me in Q3/2015. So I'm thinking do I take the pensions when we've run out of cash ... say for argument when we're both 70. For the sake of my plans I'm ignoring IHT because I'm spending cash on my family whilst we're here and whilst it is useful to them and IHT can well change anyway.

My instinct is that apart from the losses to "our estate" if we don't take the pension and simply save it then it seems like a good deal to defer it assuming we'll live to normal ages.

I've read my own note and I wonder whether it's understandable ......:)

uk1

Others interested in the subject of deferred state pensions might be interested in the reply I received from the The Pensions Advisory Service.

My question to them was quite simple.

What is the baseline pension you use when using the published deferral calculator. Is it the pension due when you would have retired - or the base pension when you actually retire having deferred it? The conclusion here and to my mind the logical conclusion is that the pension used is the pension that is the current pension when you start to actually take the pension. Otherwise what is the point in deferring if you avoid entitlement to all the interim increases? The Pension Advisory Service believe it was your original pension.

This seems daft.

Dear Mr uk1,

I refer to your email dated 20th November and can advise that we understand that enhancements to state pensions which have been deferred are calculated with reference to the level of state pension due at the beginning of the period of deferral.

To corroborate our understanding we would suggest that you should contact the area of the UK's Department for Work and Pensions which deals with State Pensions i.e. the Pension Service. Their number is: 0845 606 0265 and the attached link has contact details for the Pension Service as well: http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/DG_180132.
Regards,

I've replied:

Dear Mr xxxxxx,

Thanks you for your reply which I find perplexing.

My question basically was what is the baseline pension you use when using the published deferral calculator. Is it the pension due when you would have retired - or the base pension when you actually retire having deferred? It seems logical to my mind that the pension used is the pension that is the current pension to which you are entitled to when you start to actually take the pension. You've said it was the original pension to which you would have been entitled before you deferred. This seems daft. Otherwise what is the point in deferring if you avoid entitlement to all the interim increases? Are you confident that this is correct?

You have said that I should corroborate your understanding with the DWP - but then I'm totally perplexed as the the purpose of a Pensions Advisory Service.

uk1

uk1

In the event that anyone else is intertested in this topic - I have checked with DWP enquiry line and basically the pension is frozen at the date that you were entitled to take your pension and and not the current pension to which you would have been entitled to when you actually retire and then the defferal increases are applied.

I'm obviously thick and don't think that is clear in the government guidelines. I'd presumed that the pension that would be increased is the one to which you would have been entitled when you actually retire - and not a frozen one.

That means that people deferring, lose the pension inflation increases between the date that they were entitled to retire and the date they actually retire and the pension that is increased is their original pension. So they lose inflation increases and gain interest.

I'm really not clear about the general benefits of deferring unless you are in higher tax bands with the pension but expect to be in lower tax bands if you deferr and retire. I'm not certain that this is widely appreciated and thought I'd add the note to inform others that might be interested.