State Pension Deferral

Bettie

I've also read that I can defer the lump sum to the following tax year when I will have little income and carry on taking the pension so with a bit of maths I can plan to earn the maximum before tax including my pension, collect the lump sum the following tax year when I have no income and save a considerable amount in tax. :money:

atush

If you can defer the LS to use up some of your personal allwoance that that is better. But still not as good as a 10.4% increase in your basic pension each year deferred. Over time, if you are of normal good health you get more.

LS is better if you have become ill during deferment, but if ill from the start it is better to not defer.

kidmugsy

Bettie wrote: »

I've also read that I can defer the lump sum to the following tax year when I will have little income and carry on taking the pension so with a bit of maths I can plan to earn the maximum before tax including my pension, collect the lump sum the following tax year when I have no income and save a considerable amount in tax. :money:

The lump sum can pretty attractive if, as you say, you avoid tax on it, and you happen to want a lump sum. You can, if you want , then stop your pension again, and build up some extra pension too. You're not allowed to take a lump sum the second time.

If you are happy to gamble on getting interest of 3% p.a. above inflation for ten to fifteen years, you may not want to do buy extra pension. That seems a high risk bet to me. Index-linked gilts of that sort of maturity are paying about 1% below inflation (RPI), not 3% above.

Bettie

atush wrote: »

If you can defer the LS to use up some of your personal allwoance that that is better. But still not as good as a 10.4% increase in your basic pension each year deferred. Over time, if you are of normal good health you get more.

LS is better if you have become ill during deferment, but if ill from the start it is better to not defer.

I will have to sit down and do the maths but the lump sum doesn't eat into the personal allowance, I can earn up to the limit ( somewhere around ten thousand) and as long as I don't become a tax payer then the lump sum is tax free.

saver861

bouicca21 wrote: »

The government's leaflet on deferral
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf
(See page 13)
Gives a useful calculation. It's pretty rough as it doesn't take into account any increase in pension, nevertheless it basically suggests that it takes ten years to break even for someone taking the increased pension.

If it says 10 years then it is misleading. By way of simple numerical example, ignoring inflation etc as all being relative.

Joe retires at 66 and takes his pension which is £6000 per year. In ten years he will have collected £60,000

Bill retires at 66 and defers for a year. The increase of 10% gives him £6,600 per year thereafter. Thus 10 years after retiring he will have collected just £59,400 i.e. year one = £0 and years two to ten is 9 * £6,600 = £59,400

Exactly eleven years after they retire Joe and Bill will have collected £66,000. Joe = £6,000 * 11 and Bill £6,600 * 10.

That is the 'earliest' break even point. However, if Joe then invests the £6000 after year one at 3% then he will have around £8,000 at the eleven year break even point.

If Bill invests his 'extra' £600 each year at 3% then at the year eleven break even point he will have just under £7,000.

Joe is still about £1,000 up on Bill or the equivalent of nearly two years increased pension thus giving him another two years to be equal with Bill. In other words it is year 13 that they are at the break even point.

Of course if Bill dies anytime before that he is out of pocket.

Also, the more relevant point is that both will be 79 at the break even point. It is then down to the relevance of the additional money in their early 80's versus late 60's.

So, if people are doing calculations on a 10 year break even point they will be selling themselves short, notwithstanding early death and money relevance at respective ages of 79 v 66.

kidmugsy

saver861 wrote: »

If it says 10 years then it is misleading. By way of simple numerical example, ignoring inflation etc as all being relative.

Ignoring inflation is bonkers if you are assessing the merits of buying an index-linked annuity, which is effectively what you are doing.

You've also missed the point of the ten year break-even: it refers to breaking even 10 years after you start the pension, not ten years after you could have drawn it but didn't.

And I see that you are another optimist who assumes a steady, presumably risk-free, savings return of 3%p.a. above inflation. Good luck with that.

And after all, who could possibly want extra income at the age when they might need to pay for help with the garden, the decorating, even with cleaning the house. What's the plan: to freeload on the taxpayer?

Linton

saver861 wrote: »

If it says 10 years then it is misleading. By way of simple numerical example, ignoring inflation etc as all being relative.

Joe retires at 66 and takes his pension which is £6000 per year. In ten years he will have collected £60,000

Bill retires at 66 and defers for a year. The increase of 10% gives him £6,600 per year thereafter. Thus 10 years after retiring he will have collected just £59,400 i.e. year one = £0 and years two to ten is 9 * £6,600 = £59,400

Exactly eleven years after they retire Joe and Bill will have collected £66,000. Joe = £6,000 * 11 and Bill £6,600 * 10.

That is the 'earliest' break even point. However, if Joe then invests the £6000 after year one at 3% then he will have around £8,000 at the eleven year break even point.

If Bill invests his 'extra' £600 each year at 3% then at the year eleven break even point he will have just under £7,000.

Joe is still about £1,000 up on Bill or the equivalent of nearly two years increased pension thus giving him another two years to be equal with Bill. In other words it is year 13 that they are at the break even point.

Of course if Bill dies anytime before that he is out of pocket.

Also, the more relevant point is that both will be 79 at the break even point. It is then down to the relevance of the additional money in their early 80's versus late 60's.

So, if people are doing calculations on a 10 year break even point they will be selling themselves short, notwithstanding early death and money relevance at respective ages of 79 v 66.

I agree the figure is around 12 years after retirement. However one should bear in mind that current life expectancy estimates of someone close to retirement now are around 86-90 depending on gender and exact dates. So there is plenty of slack to take advantage of the long term benefits of deferring, assuming you have no solid reason to expect an early demise.

saver861

kidmugsy wrote: »

Ignoring inflation is bonkers if you are assessing the merits of buying an index-linked annuity, which is effectively what you are doing.

I'm not ignoring inflation - as I said, it is relative. I've ignored inflation for the simplicity of the numerical example. Add in inflation and the relative outcome will still be the same.

kidmugsy wrote: »

You've also missed the point of the ten year break-even: it refers to breaking even 10 years after you start the pension, not ten years after you could have drawn it but didn't.

Quite. So my point is that, for the one year deferment example, it would be eleven years from retirement age. So if people are calculating 10 years from their retirement date then they will come unstuck. That point does not seem to be clear to some people at least. That's without factoring in the returns from not deferring.

kidmugsy wrote: »

And I see that you are another optimist who assumes a steady, presumably risk-free, savings return of 3%p.a. above inflation. Good luck with that.

I used 3% as an example for both pension scenarios so again its relative. Make it 2% and the numbers reduce a little - 1% a bit more so. At some point you have to take a number and its referring to a 10 year period.

kidmugsy wrote: »

And after all, who could possibly want extra income at the age when they might need to pay for help with the garden, the decorating, even with cleaning the house. What's the plan: to freeload on the taxpayer?

The words 'jumping' and 'conclusion' come to mind again. The example is just that - an example of the wait period for potential returns. It is recognised by all and sundry that the older you are past normal retirement age, the less money you will need to live.

If you are bored, perhaps you could look up some research on the likely percentage of people that will die before they reach the break even point for a deferral. Combine that with the life expectancy of 80 yrs, it would seem you will have a much greater chance of popping it either before 80 or at 80. So, at best, your likely to kick just about the time when you are going to be counting the extra dosh from deferring ..... man don't you just hate it when that happens .....

saver861

Linton wrote: »

I agree the figure is around 12 years after retirement. However one should bear in mind that current life expectancy estimates of someone close to retirement now are around 86-90 depending on gender and exact dates. So there is plenty of slack to take advantage of the long term benefits of deferring, assuming you have no solid reason to expect an early demise.

Not sure where you seeing those figures of 86 - 90. Most seem to say around 79 for men 82 for women. 90 would seem optimistic as an average life expectancy for current retirees. But certainly if someone is going to hang around that long then deferral would be a good option for sure.

Linton

saver861 wrote: »

...... Combine that with the life expectancy of 80 yrs, it would seem you will have a much greater chance of popping it either before 80 or at 80. So, at best, your likely to kick just about the time when you are going to be counting the extra dosh from deferring ..... man don't you just hate it when that happens .....

Why are you using 80. According to the Government Actuary data only about 25% of men who are reaching 65 now will die by 80.

And another way to look at it: if you live to a ripe old age you will spend year after year kicking yourself for not deferring. If you do die early you wont care about the financial error - you'll be dead.