State pension deferral - pros and cons?

Doc_N

Decision time for my wife, whose state pension starts, in theory at least, shortly. As her 'financial advisor' it's down to me to decide whether or not to defer.

As a basic rate taxpayer (with a company pension) she'll currently be liable for tax on the state pension at 20%. As I read things, though, if she defers for a couple of years the lump sum would be taxed at the highest rate that applies to her other income. By that point, the personal allowance is likely to exceed her company pension, which would mean that the lump sum could be taken tax-free, saving over £1000 pa on it.

This seems a remarkably simple way to save a fair amount of money - is my understanding on this point correct?

Then, of course, the next question - whether to take the (tax-free) lump sum, or be lured into waiting still longer for the extra 10.4% pa on the pension? And that would be taxable when it was eventually paid.

No easy answer to that one - nobody knows how long they're going to live. Her concern is that she could lose all the deferred pension, with nobody (government apart) getting any benefit from it. As I understand things, a spouse can inherit the lump sum on reaching pension age, but only part of the higher pension.

I'm sure there are financial wizards in here who have been through all the figures, all the options - I'd be grateful for any shared advice.

yangptangkipperbang

Doc_N wrote: »

Decision time for my wife, whose state pension starts, in theory at least, shortly. As her 'financial advisor' it's down to me to decide whether or not to defer.

I thought an "advisor" was a person who gave advice and not someone who dictated what will happen. Doesn't you wife have any say in the matter ? It would appear to be her money after all .........................

Doc_N

yangptangkipperbang wrote: »

I thought an "advisor" was a person who gave advice and not someone who dictated what will happen. Doesn't you wife have any say in the matter ? It would appear to be her money after all .........................

Fair point, but she leaves all the financial decisions to me. We each do the things we're best at. I'm reasonably good at finance and law - she's the expert in pretty well everything else.

She'll make the final decision, but she wants me to advise. All our finances are totally pooled anyway, and always have been, so it doesn't much matter who earns what - it all ends up in a joint account.

bilbo51

Doc_N wrote: »

I'm reasonably good at finance and law...

So what's your current plan?

Aegis

Doc_N wrote: »

Then, of course, the next question - whether to take the (tax-free) lump sum, or be lured into waiting still longer for the extra 10.4% pa on the pension? And that would be taxable when it was eventually paid.

Bear in mind that the minimum waiting time for a permanent increase in the basic state pension is 1 week. The 10.4% simple annual increase is applied on a pro rated basis for each complete week of deferral.

I've done a couple of calculations recently for clients, and the lump sum generally doesn't come out very favourably, however the analysis is based on cashflow modelling of their specific circumstances, which might be significantly different to those of your wife.

In short, there isn't a definitive answer and she will need to decide which approach better suits her retirement plans.

jamesd

What's her health like? What's her age compared to yours? What's your health like? Any reason to expect that she will live to less than the 88 or so that around half of women aged 65 in normal good health are expected to reach? What existing income will she have if she lives longer than you?

The optimal deferral and taking of the higher income option for women tends to be in the three to five year range, depending on life expectancy. One to three for men.

The advantage of the higher income is that it is inflation-linked and will continue for life, so it can provide good protection for the long life case. It can also allow things like buying a level annuity or a spouse buying a pension with reduced spousal payment after the first death, potentially saving money while providing better income protection for the spouse.

I tend to be a fan of deferral as a good way to cover long life expectancy.