State Pension Deferral

Legacy_user

I reach 65 in March. I have no immediate need to claim my State Pension so I ran a simple set of figures and came up with a view very much along the lines of this post from someone in a similar situation:

'I ran a spreadsheet on the subject of 'defer or not to defer' quite recently. From the way I read the rules the 'extra 10% per year' is not index-linked and in any case I would have to live at least 15 years before I even BEGIN to get more pension! Obviously, I concluded that 'a bird in the hand is worth two in the bush' - so I become an OAP quite soon. I also suspect that there are no other benefits for me to defer, though I can see that some might avoid higher taxes or choose to defer for other reasons, but for me it was a 'no-brainer'.

I can only see an advantage in deferring a State Pension if a person is moving from paid employment to a State Pension with no other means of pension support. In such a situation, it makes sense to defer until the a person actually retires.

Are we both missing something?

bouicca21

I've deferred. I am currently a higher rate tax payer. Once I retire my state plus private pension puts me into standard rate. I'll have 6 years deferral and will collect it in a lump sum.

atush

From the way I read the rules, the 10.4% is indexed after being added (ie the first year's is indexed along with the rest of the pension in the second year of deferral). Say year 1 your pension is 100 per week. Deferred for one year, the second year it is 110.40 p/w if you take it. This whole 110.40 would then be indexed in year 3.

6 years of deferral would raise your pension hugely, unless you dont have enough cash to hand, or your new SP would tip you into 40% tax, i'd take the larger pension myself.

greenglide

bouicca21 wrote: »

I've deferred. I am currently a higher rate tax payer. Once I retire my state plus private pension puts me into standard rate. I'll have 6 years deferral and will collect it in a lump sum.

If you do opt for the lump sum the tax implications could be huge as will would be taxed at the higher rate?

Normally the increments are better value, especially if you have a partner who can inherit.

Linton

greenglide wrote: »

If you do opt for the lump sum the tax implications could be huge as will would be taxed at the higher rate?

Normally the increments are better value, especially if you have a partner who can inherit.

The deferred lump sum is taxed at the real marginal rate - ie the rate you would pay without the lump sum. See here.

The lump sum option is a very poor deal currently at about 2.5%/year. Unless there are special circumstances it is better to take the 10% higher pension after deferral or take the pension at the normal time and invest it.

greenglide

My attempt at saying "could be" ended up as "will would":(

I need a grammar checker or whatever to ensure that what I mean to type is the same as what I do type.

bouicca21

I'm no great shakes as a mathematician but I put the sums into calculator and 2.5% compounded didn't seem a great deal different to 10.4%. I'd have to live for 15 years to break even and I doubt I will. Obviously I will check out the options when I finally do take my state pension, but at the moment the prospect of a substantial lump sum, taxed as pointed out above, at standard rate, seems very attractive. My life style is fairly simple, so I can live day to day on the pension, but I really want to do some travelling and that round the world ticket is beckoning ...

System

Two things in life have a probability of 1: taxes and death. Sadly, we have no control over the latter. Thanks for all the inputs so far.

atush

I'd have to live for 15 years to break even and I doubt I will.

Why do you think you wont live more than 15 years? If you have a life limiting condition, why defer at all?

You could just put the SP income into a DC pension and leave it to a loved one?

saver861

atush wrote: »

Why do you think you wont live more than 15 years? If you have a life limiting condition, why defer at all?

Why defer anyway other than if there are HRT reasons or some other scenario that makes it viable.

There seems to be a consensus that deferring, be it state or occupational to reduce the actuarial reduction is a good thing.

Fact is, it will usually take 15 to 18 years to the break even point - taking most people well into their 70's, at which point life will start to be somewhat slower. So even if you get to the break even point, you would still need to live a reasonable number of years to retain any noticeable benefits past the break even point.

Other than emotive reasons of retention for spouses etc, from a financial perspective it never makes sense to me to defer. The money will be much more beneficial to me in my earlier years of retirement and, if I get towards my 70's still fit and hearty, then I can adjust accordingly.

If not, then I made the right decision!!

kidmugsy

Hengus wrote: »

From the way I read the rules the 'extra 10% per year' is not index-linked

Of course it is: see atush's remark.

Hengus wrote: »

and in any case I would have to live at least 15 years before I even BEGIN to get more pension!

Then you must have made some odd assumptions. More realistically you break even at about ten years after (re)starting the pension, not fifteen. Which is why people who can do arithmetic or algebra tend to think it's a ruddy good deal, and why it will be modified under the new style pension regime to make it less expensive for the taxpayer.