to defer state pension or not?

Linton

Fabius wrote: »

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.

Sorry we seem to be talking at cross purposes. This thread is about defering state pension which pays about £5500 per year from 65 by default. I am assuming that from 66 you actually need that income - if you needed it at 65 you wouldnt defer. So you invest the difference between £5500 at 66 and what state pension is actually paying.

The difference is
a) If you dont defer its the one-off £5500 you got at age 65
b) If you defer 1 year its £550 extra per year.

Option (b) is more valuable than option (a) assuming you dont die very early.

So I am not spending the invested money I am spending £5500 of the state pension. (Take off 20% tax if you want it doesnt make any difference to the overall result).

Edit: In your original post you said "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 what I am disagreeing with.

luvchocolate

thats been very interesting but I am now more confused, but will take advice from company pension supplier, as I live alone and money will be very tight when I retire and I need to get the best for me.
thank you very much for a different point of view even if most of it went over my head lol x

uk1

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.

Fabius,

Have you in the process of over generalising missed the point that the OP will be specifically around 62 when she exercises the right to defer - not 65 - giving 3 extra years to collect the higher deferred pension?

jamesd

Fabius wrote: »

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.

If you defer for one year instead, you get to take 10.4% increasing with CPI for life, not just 12 years.

To get something comparable, a CPI or RPI annuity, you'd get more like 3% for life than 10.4%; deferring is a way better deal than taking the income and buying an annuity.

You can't even take out 10.4% or 10% from income drawdown at 65 because that's above the GAD limit at the moment unless you use some of a tax free lump sum. Won't be at older ages and be not younger in the future.

But lets ignore that and look at an alternative: take the 10.4% higher income and buy a term life insurance policy for 12 years that pays out the capital amount that would be left in the pension, roughly - say half of it or two policies, one 80% for 5 years and one 30% for the rest of the time. I've looked at this before and I think you'll find it interesting, so how about you taking a look to see what happens?

Not deferring can be useful, say with lower than usual life expectancy. It's easier to be better off by not deferring and investing in a pension instead if you're a higher rate tax payer, though worse off is still more likely. But usually it'll be best to defer and get the long term inflation-linked income for life.

Jaycee_Dove

I have been going through this debate myself in recent weeks.

Like the OP I was born in late 1951 and so reach SPA this summer. My pension totals what I am advised is £122 pw.

I have no other pensions as my income has been very limited for the past decade as a carer. But I do have some ISA savings (around £30,000) which preclude me from getting any added sums like Pension Credit atop this £122 pw.

I have been getting Carer's Allowance for the past 3 years (prior to that I was earning just above the £100 pw threshold). But I will lose this on reaching SPA and have had to notify them of such.

I knew that by deferring I would still not get the planned new SP - which in my case would have really benefitted me. This is because I have mostly been self employed and so I would be around £30 pw better off on the new flat rate than I am now (come 2016 rates) given that self employed and employed will then be getting equal amounts, unlike today.

I do have 41 years of stamps and so am well over the current and also proposed new flat rate requirement but those extra years turn out to be of no advantage.

So I have tried to balance out what to do.

If I take my SP, I could save most of the money into some account and take the interest but nowhere I can see would that equal the sum gained by deferring (10/4% is way above anything I am getting on my ISAs).

If I use some of my savings to live and defer I would get that 10.4 % and over 2 - 3 years reach the sort of sum I would have got had I qualified for the new SP in 2016.

Indeed I might actually qualify for Pension Credit having used these savings up over that interim as I would still be under the old rules when I took my pension - even if those rules no longer apply for new pensioners then. Though it is likely that the extra weekly amount from this deferral would more than compensate for my reduced savings and so the total sum per week would mean that I would still not qualify.

Which is not important as £155 pw is far better than £122 as now.

Having to'd and fro'd over what to do I think that deferring for maybe 2 - 3 years looks my best option.

One advantage is that I can stop defering at any point if I cannot manage. And even after a year I will be at least up to around £135 pw anyhow.

Reading the above answers has made me think this all through again but I am still not seeing why deferring would not be my best option.

Am I missing something?

uk1

I don't think you are missing anything.

If you can fund a deferral then it seems obvious that you should do for a few years. My wife is a year older and hers is now just in it's third year of deferral and we're determined for her to live long enough for her to make the decision absolutely worthwhile.

Jaycee_Dove

Just to add for anyone else going through these calculations.

For making comparisons the £144 pw (ish) quoted for the new flat rate pension from 2016 is cited at today's value. So I am assuming it will rise via inflation to maybe £150 - £155 pw by time of introduction.

uk1

I'm unclear as to why you are discussing the "new" pension. You are not and never will be eligible for it. Also the deferral rate for those people who will qualify for that pension is half the deferral rate you will receive if you decide to defer. They will also be much older before they an defer. So their calculations and the probable conclusions will be very different. It seems unlikely to me that it will make much sense for the vast majority under the new scheme to defer.

Jaycee_Dove

I am only discussing the 'new pension' in relation to my position via the current system, as you will see from my earlier post in this thread.

I am very siginificantly effected by the change (from which I am well aware that I will never benefit) - being a woman whose SPA has been delayed twice, being self employed, having paid in 6 years more than the maximum required even under the new system and 11 years more than now, and being very low paid (being able to do less work than I otherwise could whilst also being a full time carer).

All these things have contributed to me still have my pension delayed, paying far more stamps than are actually useful (as they add no second pension being self employed), missing out on the equanimity of self employed gained from the new pension rules, having only a very small amount of private savings which will earn nowhere near enough in the terrible climate today to close the gap between my SP and what would be the new minimum SP in 3 years time but still just sufficient to prevent any pension credit being awarded - which on the current rules is supposed to close that gap to create a living minimum income.

As such I realistically few options that I can see but to defer to close that gap - even though deferring means I will have next to nothing to live on but my 'pension savings' held in ISAs during the 3 years of deferral.

It is not really relevant to future pensioners, especially poorly earning women, carers and self employed (like myself), who will benefit considerably from the new flat rate pension.

I do not benefit but they will and I applaud these changes for those who will gain this improvement in future.

For me that is just how the cookie crumbles. I accept that and I have to do what I can in the circumstances. I was just explaining why for me deferral seems my best option having thought it through.

All decisions of this sort will be individual ones for people to make. The new rules and flat rate SP will alter the calculations in future. But it seemed worth setting out why I have chosen to defer here.

And it was directly to be able to close the gap between what I am getting now under the 2013 pension rules and what I would have gotten in identical circumstances if the new 2016 rules were in place right now.