State pension deferral - worth while??

jamesd

Assuming normal good health and an age close to 65 it's optimal for males to defer for 1-3 years and females 2-5 years. This is picking the optimal range from curves of expected actuarial benefit from an actuarial study of the question. Those with long life expectancy might benefit from a bit longer, those with shorter life expectancy from less or no deferring.

Deferring can be done in one of two ways:

1. By not claiming the state pensions.
2. After starting to receive them, you can defer once per lifetime on request.

Some people who have money now but who might, say, have a level annuity, may choose to defer for longer to get an increase in the state pension part of their income that increases with inflation. This provides extra protection for living a long life or possible periods of high inflation.

Linton

jamesd wrote: »

Assuming normal good health and an age close to 65 it's optimal for males to defer for 1-3 years and females 2-5 years. This is picking the optimal range from curves of expected actuarial benefit from an actuarial study of the question. Those with long life expectancy might benefit from a bit longer, those with shorter life expectancy from less or no deferring.

.......

From my calculations based on a simple death age at 87 I can duplicate your figures by adding in a DCF calculation. So yes, if you plan to invest all your SP income on a reasonable set of equity investments then your optimum deferral age goes down to low figures depending on your investment return. However if you plan to use the SP income to maximise your expenditure before you die then the figures I propose are perhaps more relevant.

jamesd

At the top end of the ranges I gave the chance of being better off was decreasing, fairly steeply for males. The difference is probably that the study wasn't just using money but was also including the chance of dying each year and that starts to reduce the chance of being better off as the years pass, or if you start at a later age.

The calculation you did is a lot better when deferring is looked at as a way to provide for the chance of living a long life, without worrying about what happens if you happen to die in the younger years.

Linton wrote: »

However if you plan to use the SP income to maximise your expenditure before you die then the figures I propose are perhaps more relevant.

That's when your figures are most problematic. The longer the deferring, the greater the number who end up worse off from deferring, dying while still deferring or before they have recovered the income not received while deferring.

You might find it interesting to get a mortality table and factor that in to work out the chance of being better off as the number of years of deferring is increased.

jamesd

While neither is the study I referred to, here are two articles that you may find interesting:

How long should you defer?
Deferring State Pension

Linton

jamesd wrote: »

At the top end of the ranges I gave the chance of being better off was decreasing, fairly steeply for males. The difference is probably that the study wasn't just using money but was also including the chance of dying each year and that starts to reduce the chance of being better off as the years pass, or if you start at a later age.

The calculation you did is a lot better when deferring is looked at as a way to provide for the chance of living a long life, without worrying about what happens if you happen to die in the younger years.

That's when your figures are most problematic. The longer the deferring, the greater the number who end up worse off from deferring, dying while still deferring or before they have recovered the income not received while deferring.

You might find it interesting to get a mortality table and factor that in to work out the chance of being better off as the number of years of deferring is increased.

Yes the more one looks at what is apparently a simple question, the more complex it gets. If you die early before you have recouped the costs of deferring you dont care because you are dead whereas if you defer too early you could spend years regretting your mistake.

For interest, from my non DCF calculations if you defer until 72 you have roughly 30% chance of actually loosing out. Deferring til 70 makes it around 25% and 66 15%. Note that these figure are for the cohort born in 1951 as the statistics dont go back further.

patanne

At least if you die before taking the deferred state pension all the lump sum goes into your estate

ETA - this is not correct see #31

System

patanne wrote: »

At least if you die before taking the deferred state pension all the lump sum goes into your estate

Someone said earlier up the thread that one way of defering was simply to not claim your pension immediately.
What happens if you don't claim but then die?

System

Another factor not so far mentioned is what kind of flexibility you have regarding your work and retirement options, and ultimately whether you want to retire, wholy or partly, or not.

As a director of a small firm I can chose to continue to work any number of days or hours I like, indefinitely if I wish.
I am considering progressive retirement, perhaps one day a week, per year, over the next 5 years. or perhaps not.

In flexible circumstances like these the SP would conveniently substitute for employed income, if I dropped my working week. But the optimum balace from a financial point of view would be to work full time until I am 85, and defer the SP until death and then take a lump sum.
That's taking a long-term view. But then that's not retirement

sleines

Its the Pension Service (DWP) you need to contact not the Pension Advisory Service. The new claims number is 0800 731 7898 - I understand you don't want to claim yet but on this number they can tell you how much you were entitled to 3 years ago, today and in X years so you can make an informed decision yourself

sleines

Clifford_Pope wrote: »

Someone said earlier up the thread that one way of defering was simply to not claim your pension immediately.
What happens if you don't claim but then die?

This is direct out of State Pension Deferral guide

'What happens if I die?
This depends on whether you are married or in a civil
partnership, and whether you die before or after you claim
your State Pension.
If you are married or in a civil partnership and you die,
your husband, wife or civil partner may qualify for extra
State Pension or a lump-sum payment because you put
off claiming your State Pension.
If you put off claiming your shared additional pension,
the rules are different. However, your husband, wife or
civil partner could still inherit all or part of the lump sum from putting off your shared additional pension if you had
already claimed your State Pension and had chosen a
lump sum before you died. In this case it will form part of
your estate.
If you die after claiming your State Pension but before
choosing to get extra State Pension or a lump-sum
payment, someone may be appointed to make this choice
on behalf of your estate. (You have three months after
claiming your State Pension to decide whether you want
to get extra State Pension or a lump-sum payment.)