MSE News: Deferring your pension set to be worth less from 2016

Former_MSE_Paloma

If you delay claiming your state pension, you'll gain less if you do it after April 2016 under new Government proposals...

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Deferring your pension set to be worth less from 2016




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kidmugsy

It's not really "news": it's been talked about for ages. The difference seems to be that

(i) It's now explicit that it won't affect deferral of old-style pensions
(ii) The new rate of accruing extra pension will be 5.8% p.a. rather than the feared 5.2%.

P.S. As far as I can see, it's wrong to say "If you delay claiming your state pension, you'll gain less if you do it after April 2016 under new Government proposals..." Someone on old-style could "defer" (i.e. suspend) after April '16 and still get 10.4%.

greenglide

Someone on old-style could "defer" (i.e. suspend) after April '16 and still get 10.4%.

The article doesn't specifically say that. The nearest is the statement "The new rate will take into account the value of income given up by delaying claiming the new state pension –". The term "new state pension" has replaced the use of Single Tier Pension.

kidmugsy

It says

"Who's affected?

Women born on or after 6 September 1952, and men born on or after 6 April 1951 will be affected by the plan."

So if you're old enough to be on the old-style pension it won't apply to you. Unless that too is just rotten writing.

jamesd

Because the rule doesn't consider personal circumstances, these people are most likely than average to gain from taking the increase:

1. women. Women live longer than men on average.
2. those with a spouse who may outlive them, because the spouse can get some of the money.
3. those with a higher than normal life expectancy.

Those who are likely to gain less than average include:

4. men, because they tend to live shorter lives than women.
5. those who are single, so a spouse won't benefit from any of their pension.
6. those with shorter than normal life expectancies, perhaps due to health conditions.
7. those living in Scotland, notably in Glasgow, where life expectancies tend to be shorter overall.
8. those who have mostly done outdoors manual work, whose lives tend to be shorter overall.

The proposal is likely to be better than purchasing any annuity on the market except possibly a level annuity. Because of the inflation linking it's also likely to be better than drawdown from a personal pension in many long or average life cases.

Pincher

What? I thought we were going to a FLAT-RATE pension in April 2016?
How does deferring work for a flat-rate pension?

A few pounds here, a few pounds there, it's still shrinking the payout by any means they hope you won't notice.

A really good trick would be to encourage unhealthy people into deferring. That will really save big on the state pension pay out. They don't get paid, and then die. Another one would be free euthanasia on NHS.

Doc_N

There are tax implications in deferral too, which should be taken into account.

For example, as a basic rate taxpayer (with a company pension) my wife would currently be liable for tax on the state pension at 20%. Having deferred for a couple of years, though, the resulting lump sum will be taxed at the highest rate that applies to her other income. By that point, the personal allowance will exceed her company pension, which will mean that the lump sum can be taken tax-free, saving over £1000 pa on it.

Whether to take that (tax-free) lump sum, or wait still longer for the extra 10.4% pa on the pension is another question.

No easy answer to that - nobody knows how long they're going to live. The 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.

Complicated area, with no simple answers.

matelodave

I've known three people who deferred their pension and none of them lived long enough to gain - they all lost out, one guy never saw a penny.
In my view, if you don't actually need it is to take it and put it into an ISA or other form of savings account and get a bit of interest on it rather than letting the Government hang onto it

kidmugsy

Doc_N wrote: »

.

Whether to take that (tax-free) lump sum, or wait still longer for the extra 10.4% pa on the pension is another question.

No easy answer to that

There's a fairly easy answer: delete the "or". Take her pension and the lump sum tax-free, then suspend ("defer") again to build up the extra pension. Double whammy.

jamesd

Doc_N wrote: »

Whether to take that (tax-free) lump sum, or wait still longer for the extra 10.4% pa on the pension is another question.

No easy answer to that - nobody knows how long they're going to live. The concern is that she could lose all the deferred pension, with nobody (government apart) getting any benefit from it.

There's a fix for that concern. Term life insurance policies. The gain from deferring is great enough to cover the cost of buying the insurance and still leave the person or their estate beneficiaries, rather, better off. Assuming only that the person's health is good enough that they are likely to gain from deferring, which implies that the life insurance will also be cheap enough.

Doc_N

kidmugsy wrote: »

There's a fairly easy answer: delete the "or". Take her pension and the lump sum tax-free, then suspend ("defer") again to build up the extra pension. Double whammy.

But if you take the lump sum you lose the extra 10.4% pa pension uplift - you can't have it both ways!