to defer state pension or not?

avydavy

Hi

I was born at the end of 1951 and can claim my state pension in July 2013.

If I defer claiming until the 'new' state pension of £140ish in 2016, will I be paid my pension at that higher rate or at the lower rate payable when I could have claimed my pension in 2013?

Is it my date of birth which will be taken into account or the date I claim the pension?

Avril

Linton

avydavy wrote: »

Hi

I was born at the end of 1951 and can claim my state pension in July 2013.

If I defer claiming until the 'new' state pension of £140ish in 2016, will I be paid my pension at that higher rate or at the lower rate payable when I could have claimed my pension in 2013?

Is it my date of birth which will be taken into account or the date I claim the pension?

Avril

It's the date when you are eligible for your pension - deferring makes no difference. Note that the new state pension arrangements have yet to be put to Parliament so nothing is cast in stone.

There are great advantages in delaying state pension for a few years if you dont need it - you get 10% extra for each year delayed. So if you delay till 2016 you could be up to around £140 anyway under the old scheme. The % is proposed to be reduced to 5% under the new arrangements.

SeekTruth

avydavy wrote: »

Hi

I was born at the end of 1951 and can claim my state pension in July 2013.

If I defer claiming until the 'new' state pension of £140ish in 2016, will I be paid my pension at that higher rate or at the lower rate payable when I could have claimed my pension in 2013?

Is it my date of birth which will be taken into account or the date I claim the pension?

Avril

Linton's comments are correct, but seem to be assuming that you are entitled to about £110/wk (e.g. the full basic state pension and zero additional pension). If you don't know this for sure then it may be a good idea to get a state pension forecast

atush

I agree with Seek, you should check your pension entitlement thru a forecast, as you may be disregarding any S2P/additional pension built up over the years.

But yes, deferring your SP will be a good way to boost it if you won't be retiring right away and dont' need it.

Fabius

Deferring State Pension only makes any sense for a higher rate tax payer who will suffer tax on it until they stop work and become a basic rate payer.

Whatever increase you get in the starting amount (and that could change at any point if the Government chooses, look at people who didn't contract out and will now have no SERPS/S2P when the flat rate scheme comes in!) will never make up for what you lose by not claiming it and saving it somewhere.

Any lump sum you take through deferring will only have interest paid at BoE + 2%, which you could get in a regular saver account (and have the money in your control)

Plus you also have to live for long enough for these options to bear fruit.

If you have ongoing income then you could recycle the state pension payments into a personal/stakeholder pension scheme (new or existing). This would be tax neutral at worst, and this would generate an entitlement to 25% of the fund that you realise in the future as a tax-free lump sum under current rules, with the rest being used to provide a taxable income in a variety of formats, depending on your situation.

I always cringe when people tell me that they are deferring their State Pension, it really only makes financial sense in a few limited circumstances.

The golden rule for any money that Government is offering up for you: check that you are entitled to it and if you are, take it as soon as you can get it and for as long as they are offering it.

Linton

Fabius wrote: »

......
Any lump sum you take through deferring will only have interest paid at BoE + 2%, which you could get in a regular saver account (and have the money in your control)

Plus you also have to live for long enough for these options to bear fruit.
...

Suggest you do some calculations. Assume pension = £5500 at SRA and investment return of 5%.

Scenario 1: Invest first year pension and spend subsequent years
Scenario 2: Defer 1 year, spend £5500 and invest £550 each year from year 2.

Scenario 2 savings overtake scenario 1 savings after 14 years. Average life expectancy is something like 20 years from SRA.

jamesd

Fabius wrote: »

Deferring State Pension only makes any sense for a higher rate tax payer who will suffer tax on it until they stop work and become a basic rate payer.

That is not so. Men in good health can expect to be better off by deferring for 1-3 years and women by 2-5 years. Depends on individual life expectancy. That's about half of all 65 year olds living until they are 88 or older.

People who think deferring is a bad idea usually do so because they get the life expectancy badly wrong, like by using life expectancy at birth instead of cohort life expectancy at retirement age.

luvchocolate

I will defer mine next year for approx 3 years until I retire and take the enhanced pension, otherwise I would be taxed on it while still working and will be under the tax threshold when I retire, I would suggest you get a forecast and do your sums to see whats best for you

Fabius

Cohort estimates of life expectancy at age 65 – April 2011 - DWP

Males - 2012 - 21.7 years
Females 2012 - 24.1 years

Obviously you have to get the correct age for a woman based on the specific SPA.

Linton, I can't make any sense of your scenarios from what you have posted, if you expand I'll happily consider them.

luvchocolate, if you're still working then you could put the entire amount of the pension, depending on your earnings, into a cheap stakeholder pension, or add it to an existing company pension. That's some £17,000 into a pension, £4,250 you get back tax free whenever you start taking benefits and the rest you can take an income in a style that suits, which can be beneficial if you are married as you can build in more than the State pension would provide. Of course, this might not work out, depends on annuity rates and the value of the increase to the State Pension in the three years. But you have options.

There is a saying...

A bird in the hand is worth two in the bush.

Pension deferred is in the bush, on the Government's land.

Linton

Fabius wrote: »

Cohort estimates of life expectancy at age 65 – April 2011 - DWP

Males - 2012 - 21.7 years
Females 2012 - 24.1 years

Obviously you have to get the correct age for a woman based on the specific SPA.

Linton, I can't make any sense of your scenarios from what you have posted, if you expand I'll happily consider them.

luvchocolate, if you're still working then you could put the entire amount of the pension, depending on your earnings, into a cheap stakeholder pension, or add it to an existing company pension. That's some £17,000 into a pension, £4,250 you get back tax free whenever you start taking benefits and the rest you can take an income in a style that suits, which can be beneficial if you are married as you can build in more than the State pension would provide. Of course, this might not work out, depends on annuity rates and the value of the increase to the State Pension in the three years. But you have options.

There is a saying...

A bird in the hand is worth two in the bush.

Pension deferred is in the bush, on the Government's land.

In order to compare the options of defering and not deferring state pension you need to apply the same standard. So two equivalent possible things you can do at 65 is to take your state pension, currently £5500 or there abouts and invest it with an undemanding 5% return. Then from age 66 you take and spend your £5500. The alternative is to defer your state pension until age 66 from which point you will get £550/year extra. So to be equivalent you invest the extra £550/year with the same return and spend the basic £5500.

So in both cases you are spending £5500/year from age 66 and investing everything else. A quick spread sheet calculation shows that by deferring for 1 year after about 14 years you have a larger investment pot than taking the pension at 65. And 14 years is well below the average life expectancy.

Which shows that your belief that deferring is only worthwhile for higher rate tax payers to be incorrect from a financial point of view.

Fabius

Why are you spending the invested income in one hit at age 66?

You invest £4,400 (the net amount received, assuming it doesn't go into a pension) and return £4,620 by the end of the year if you get a net 5% return.

At the beginning of year 2 you start to draw down the £4,620 at 10% a year, you still earn 5% on the invested balance. The next year you drawdown 10% of £4,620 plus say 2.5% for inflation (you can vary this to provide different scenarios)

Your capital actually runs out in the middle of year 12. You are 77. If you want to base the decision purely on life expectancy then the odds of success are in your favour if you defer.

However, consider also:

Having the money in your control;

The ability to add the income taken to other savings (notably in existing uncrystallised pensions), which can make a significant difference to the efficiency of the capital that you have in your pocket;

Government changes rules swiftly. Look at womens' pension age as an example. The OP wants to consider deferral until the new flat rate comes in, deferment rates are expected to halve to 5% at that point. Do you trust the Government not to do that earlier and apply it retrospectively to all those in deferment (don't think it couldn't happen);

The ability to structure the income that you receive in a way that best suits your circumstances, there are many reasons that you might be able to forgo taking income from the pot for a couple of years, which would extend its reach into old age, for example if you didn't need to draw down in year 2, the fund would go for another 2.5 years.

There are other reasons, many of them in fact. I'm not saying that deferring is a bad idea, in fact it is a very good option to have available at the moment. What I am saying is that it requires a great deal more analysis than just looking at life expectancy and the bottom line and we shouldn't just blindly lead people into life changing decisions on that basis.