State Pension Deferral

saver861

Linton wrote: »

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.

80 seems to be the general life expectancy figures that are being portrayed. So if you still around after 80 its likely it wont be for long!!

Linton wrote: »

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.

Yes perfectly valid point which I have considered. In that case though its then a decision on the validity of the additional money before popping it early. You defer and live a little more stringently - if you stay around great - if not, your last years were a little more stringent than were necessary.

Effectively that's what it all boils down to for people with normal health, tax, circumstances etc.

Linton

saver861 wrote: »

80 seems to be the general life expectancy figures that are being portrayed. So if you still around after 80 its likely it wont be for long!!
.

80 may be an rough average of the whole population now, but we arent talking about the whole population. We are only talking about those who are alive at retirement age, say 65. Those people would obviously be healthier than the initial average. Also the people who are dying now are more likely to have spent significant time smoking or working in unhealthy occupations than those reaching retirement age now. Both these factors lead to a figure of 86-90 average age at death in 20 years time.

As anecdotal evidence, the Queen apparently used to employ one part timer to send out 100th birthday telegrams, she now has a team of 3.

jamesd

saver861 wrote: »

80 seems to be the general life expectancy figures that are being portrayed.

Press reports normally give "period life expectancy at birth". Even that is now above 80 for men and women combines, as this chart shows. For planing purposes cohort life expectancies at birth are now about 90 for men and 94 for women. This is part of why you'll see press reports about lots of people being born now expected to live to be older than 100.

The correct one to use for this purpose is "cohort life expectancy at your current age". The Office for National Statistics publishes these regularly. If you want the latest set go to the page Period and cohort life expectancy tables, 2010-based and download file D1: 2010-based cohort expectation of life, 1981-2060, Principal Projection, United Kingdom (Excel sheet 209Kb). From that document here are the current male and female average life expectancies for various ages:

Age now males females
50 36.1 39.3
55 31.0 34.1
60 26.1 29.1
65 21.7 24.3
70 17.5 19.8
75 13.6 15.5
80 10.2 11.5
85 7.2 8.0
90 5.0 5.4
95 3.5 3.6

saver861 wrote: »

if you still around after 80 its likely it wont be for long!!

10.2 more years for men, 11.5 for women, on average. Quite a few will make it to over 100.

mgdavid

jamesd wrote: »

...........
(Cohort life expectancy at 80 is...)
10.2 more years for men, 11.5 for women, on average. Quite a few will make it to over 100.

and those are the figures as calculated in 2010, they will have improved a little since then. Life expectancies are creeping up all the time due to many factors.
By the time I get to 80 it might be 12 years.
By the time JamesD gets there it will be a bit more again.
There's a sort of sick fatalistic way of looking at this - every time one of your contemporaries dies it improves your statistical chances of living a bit longer.

saver861

jamesd wrote: »

Age now males females
50 36.1 39.3
55 31.0 34.1
60 26.1 29.1
65 21.7 24.3
70 17.5 19.8
75 13.6 15.5
80 10.2 11.5
85 7.2 8.0
90 5.0 5.4
95 3.5 3.6

From that then anyone around 55-65 now can expect to live to about 86.

There are two other groups which the break even point will be even longer than others i.e. those who move from being non-tax payers to Basic Rate payers on receipt of their state pension. I expect that might be the majority.

Following the previous example:
Joe and Bill are on £7000 income before taking the pension, i.e. £3000 below personal allowance at £10,000 for example.

Joe takes his pension and he is then £3,000 over the allowance. Bill defers and takes it a year later with the 10% enhancement, thus £3,600 over personal allowance.

Even just taking the eleven year break even point from retirement date, Joe will have paid £6,600 tax in that eleven years. Bill will have paid £7,200 tax in the same eleven year period i.e. Joe pays £600 per year for eleven years and Bill pays £720 per year for ten years.

The £600 difference means the eleven years to break even instantly becomes twelve years. Add on the two years or so that Joe can make by not deferring his pension and we are up to 14 years in total to break even!!!


On top of that, the ongoing benefit is not 10% but 8%. Bill will still be paying his tax on the 'extra' £600 which really means his 'extra' is only £480. So *if* Bill lives to the expectancy age of 86 then his total benefit for deferring is just £480 per year - totalling about £2880. Is that money really going to be beneficial to Bill at that age and worth the risk of deferral? Not in my opinion to be honest.

I'm sure kidmugsy will be pleased that Bill is continuing to pay his additional tax as the kid seems to be somewhat concerned about the taxmans solvency!!

kidmugsy

The main lesson of this thread is that some people have a visceral dislike of the idea of deferring their pension and will come up with any old tosh to rationalise it.

saver861

kidmugsy wrote: »

The main lesson of this thread is that some people have a visceral dislike of the idea of deferring their pension and will come up with any old tosh to rationalise it.

Oh I must have missed that bit.

My reading of the lesson was that everybody should familiarise themselves sufficiently with the detailed facts for their situation and then make their decision based on those facts, rather than any headline quotes.

At least, when it comes to the time for me to make that decision, I will be perusing the facts and have my figures checked by another eye.

jamesd

saver861 wrote: »

From that then anyone around 55-65 now can expect to live to about 86.

It is not possible to defer the state pension age age 55 and at 65 when deferral is roughly possible the life expectancy is to about 87 for men or 89 for women, though it's actually about a year higher due to updates since the 2010 data..

saver861 wrote: »

those who move from being non-tax payers to Basic Rate payers on receipt of their state pension. I expect that might be the majority.

Your expectation is unlikely to be right. To defer you must have some other source of income to live on and that eliminates from the pool of possible deferrers those who don't have that money. So we end up with those who are supported by another person or those who are likely to be paying basic rate tax anyway.

Joe at £7,000 income before state pension. The low earner level of the state pension under the current system after a full working life is about £190 a week, £9,880 a year, ends up with a total of £16,800 before tax. With a £10,000 personal allowance £6,880 is taxable and after tax income is £15,504.

Bill starts the same way but defers for a year. Bill pays no income tax in the first year because his income is within the personal allowance. Bill now claims his state pension and his £9,880 state pension is increased to £10,907.52 because of the deferral. His gross income is £17,907.52, net income £16,326.01. Bill also had to use £15,504 - £7,000 = £8,504 of savings to keep his income for the year of deferral at the same level as Joe, £15,504. In addition Bill has lost about half of say 2% interest after tax on the £8,504 that was spent (half because the drawing is not at the start of the year), so is short by another £85.04. Total net deficit for Bill at the start of the second year is £8,504 + £85.04 = £8,589.04.

Assuming that both now switch to investments that means the deficit keep up with inflation and that pensions also increase with inflation we can now work out the break even time.

Each year Bill is getting £822.01 net more than Joe.
After 8,589.04 / 822.01 = 10.44 years Bill matches Joe and from then on is ahead.
If deferral started at 65 that means Bill is ahead of Joe for 10.3 years to average life expectancy at 65 for men.

But Bill is cleverer than that and arranges to be better off every year after the first by not trying to break even in 10.4 years. Instead Bill takes half of the higher income to spend each year and doesn't get back to the £8,589.04 of savings until 20.9 years have passed. Bill then realises that he can also be better off in the first year by drawing more from savings and extending the time to top up savings a little more, since he knows he has 21.7 years available to average life expectancy.

Joe should now be crying, realising that by deferring for a year Bill has managed to arrange to have an income that is £411 after tax more a year than him and if Bill lives longer that gain will double once the savings are recharged.

Meanwhile Bill gets ourt his calculator and starts to work out how much more better off he could be by deferring for two or three or more years instead of one and realises that he could easily get to £1,00 or £1,500 or more than Joe and still break even before reaching average life expectancy.

Bill smiles at how kind the government is to those who can do basic mathematics or who can take the advice often given here that deferring is a good idea for those of normal good health.

saver861 wrote: »

Following the previous example

with another one using cooked numbers to make deferring look bad.

saver861

jamesd wrote: »

Your expectation is unlikely to be right. To defer you must have some other source of income to live on and that eliminates from the pool of possible deferrers those who don't have that money. So we end up with those who are supported by another person or those who are likely to be paying basic rate tax anyway.

I think you misunderstood my point. My assumption was that those deferring would have some income but its possible that income will be less than Basic Rate Tax allowance. I was basically generalising on people with an occupational pension between £4,000 and £10,000 and thus non tax payers. My wife will have about £8000 occupational pension but will not be a tax payer. Its unlikely people with less than £4,000 can afford to defer.

The average public sector pension is £7000 which apparently is about double that of the private sector at £4,000. On that basis it is a reasonable assumption that most people at state pension age will have an income less than the personal allowance and the state pension is likely to take them into basic rate tax.

jamesd wrote: »

Joe at £7,000 income before state pension of the low earner level under the current system of about £190 a week, £9,880 a year, ends up with a total of £16,800 before tax. With a £10,000 personal allowance £6,880 is taxable and after tax income is £15,504.

You have gone into a lot of detail and I have tried to follow it but you misunderstood my starting point.

In my simple example Joe and Bill were both on incomes of £7,000 that might be an occupational pension or other source. So it was just £7000 and not the residue of a £9880 earning.

jamesd wrote: »

Bill smiles at how kind the government is to those who can do basic mathematics or who can take the advice often given here that deferring is a good idea for those of normal good health.

with another one using cooked numbers to make deferring look bad.

But that's where I can say you are wrong. What would be the point of me trying to make derring look bad, or vice versa? I don't get that at all.

When I get to the point of making the decision I will be looking at all options - I'll say it again, all options. I'm not the least bit concerned about making deferring look bad - I'm a lot more concerned about getting the facts right - and if I can calculate deferring to be beneficial then that's what I will do.

My point is simply on the basic model, that the break even point of 10 years is not entirely valid. You can then take the individual circumstances and do the calculations for those circumstances and take into account life expectancy etc. and come to a decision.

So for me, these forums and discussions are part of my research and learning process. I find it particularly amusing that people assume I am anti deferral when in fact being anti or pro would be completely irrelevant and pointless.

As with all of these things the facts are the most important data. Again, as with all of these things, the more you learn you realise there is something else you were not aware of. I am not a financial guru, my profession was far removed from financial specialism. Those on here who are financial professionals will clearly know more than I, if not then that would be concerning!! For the rest of us, it is a means of learning and getting the facts.

If I don't agree with your facts it is very likely its because either you are wrong - I am wrong - or you or I misinterpreted the point at hand.

Defer if you want - by all means. I won't defer unless and until I have a greater probability of its benefits.

jamesd

saver861 wrote: »

I think you misunderstood my point. My assumption was that those deferring would have some income but its possible that income will be less than Basic Rate Tax allowance. I was basically generalising on people with an occupational pension between £4,000 and £10,000 and thus non tax payers. My wife will have about £8000 occupational pension but will not be a tax payer.

I used the £7,000 of non-state pension income that you used.

saver861 wrote: »

it is a reasonable assumption that most people at state pension age will have an income less than the personal allowance and the state pension is likely to take them into basic rate tax.

I also used that assumption.

saver861 wrote: »

In my simple example Joe and Bill were both on incomes of £7,000 that might be an occupational pension or other source. So it was just £7000 and not the residue of a £9880 earning.

£7,000 is not the residue of £9,880 earning. £7,000 is the non-state income and £9,880 is 52 weeks of £10 a week state pensions. I used £190 because that is the state pension that a lifelong low earner under the current system could get.