Should I defer or not?

Mrs_Mum99

I have 2 section 32 policies which I can take at 60. I can defer them at a rate of 1/7% per week, which I make 7.4% per annum.
I don't need the money at the moment.
Should I defer or should I take the money and invest it?
Thanks for any opinions!

Linton

Assuming everything else is equal (eg tax rates adjustment for inflation) I calculate the following...

Assumptions

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1) Deferred increase in pension/year =1.077 (1/1.00142857)^52 and is cumulative. ie pension factor if you defer by 2 years is 1.077*1.077=1.16.
2) No inflation
3) You take your pension at 60 and save the unused pension until you retire. This saved pension is invested at 3% for the rest of your life.

Results

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In terms of cumulative income, including interest on savings, you are better off taking the money at 60 unless you live to a very old age. In most cases the accumulated income and the ongoing interest outweighs the alternative of a higher income when retired. However if you were to get no interest on your savings by 75 or so the higher pension by deferring wins out.

So I would say things are pretty marginal either way which perhaps is not surprising - thats probably why they use the 1/7% figure. It may depend on whether you need the extra income when retired and so dont benefit from potential interest.

NB my calculations and assumptions could be wrong!!

NNB I have assumed you spend all your pension whilst retired . Of course if you save the excess deferral pension gaining interest then deferring could be
more worthwhile.

jamesd

Is that a 7.4% increase in payment for the rest of your life for each year of deferral? If it is, it's quite attractive because ignoring inflation-related increases it has a payback time of just 13 years. At 60 about half of people in normal good health can expect to live to 86 or older, 26 years.

However it's not quite that easy because you can take the pension and invest the year's income instead and that will make up for some of the difference. Or more than some, it could do better if you did well with your investments. What this does is increase the break-even time significantly.

How are you set for other income? I'm assuming that this is defined benefit income and nicely protected against inflation, so it's a good deal more certain than any investment income you might have. Since a lot of people aren't experienced with investments that tends to make it better for most people to defer and take the guaranteed secure extra income for life. And that tends to be my default suggestion.

With two policies you could do something different with each of them.

When do you reach state pension age, before or after the proposed flat rate pension introduction, likely in 2016? If it's before, you can defer the state pensions and get a 10.4% increase in those for each year of deferring. The rate for those under the flat rate scheme is likely to be unattractive and not worth taking, you'd be in the flat rate scheme if you reach state pension age after it comes in. Because the 10.4% is better than the 7.4% it'd be good to take this income and defer the state pensions if you have to choose one and your state pension age is before the flat rate comes in.

Other things to consider, though, are:

1. Any spouse? What are the death benefits like? Any pension for the spouse? If you take the income you can invest it and it can be inherited to provide spousal income.
2. Any inheritance concerns? Take it and invest it and it can be inherited. You could defer and invest the extra income instead to achieve this result after a while, though.
3. Any need for a lump sum that you could accumulate by taking it at 60 and investing it?
4. What is your tax situation like? Would deferring it cause an increase in your tax bracket that would reduce the gain from deferring?

kidmugsy

jamesd wrote: »

2. Any inheritance concerns? Take it and invest it and it can be inherited. You could defer and invest the extra income instead to achieve this result after a while, though.

If you gift capital to avoid Inheritance Tax (IHT) you have to survive 7 years for it to work. But if you gift out of surplus income you avoid IHT without the wait: apparently if you were to use, say, a monthly or quarterly standing order HMRC would recognise it after something like a couple of years worth of gifts; perhaps even less.

Mrs_Mum99

Thanks for the replies.
My state pension is due in 2019, so I will be under the new system.
My retirement form from Aviva says that there is no spouse's pension and that there is no increase when the pension is in payment. No lump sum.
I currently pay very little tax. If I take the pension now, I will pay 20% tax on it. If I defer for a couple of years I may still be working, maybe not. A lot depends on whether my job is still there or not!
I am cautious by nature and my gut feel is to take the money, but I hate paying unnecessary tax.
I will mull it over. I have til January to make the decision but obviously I could take it at any time after that.

jamesd

You could take it and pay the taxed portion into a personal pension.

Do you think that between all work defined benefit pensions, the state pensions and annuities you would end up with an income of more than £20,000 a year? I'm wondering whether you might qualify for flexible drawdown instead of capped drawdown.

kidmugsy

You could always avoid the tax by contributing to a new pension. You can contribute up to your current earnings less any other pension contribution you're making. That way you'll build up a tax-free lump sum plus some future income to be taken, perhaps, as income drawdown rather than annuity.

In your shoes I suspect I'd defer, but only after checking carefully to see whether there's any benefit I might lose by deferring.