State Pension Deferral

saver861

saver861 wrote: »

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: »

I also used that assumption.

No - your statements does not reflect that i.e.

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.

You state that either the only non tax payers are those supported by others who are likely to be tay payers anyway.

Somewhat opposite to my point, based on the average occupational pensions in public and private sectors being less than £7,000. Thus the facts are clear that most people at state pension age will have an income less than the personal tax allowance and the state pension will take them into basic rate tax payers, to which there will be a negative impact on deferrals.

jamesd wrote: »

£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.

But in my example I used the figure of £6,000 as being close to the current state pension for those with 30 years. You have increased that figure to £9,880 as being the potential someone could get in state pension currently. That is an extreme exception as you well know and thus skews the tax figures. Most people will be lucky to get the flat rate pension with their 30 years service which is just under £6,000 currently.

In summary, my point on tax and derring is:

a) any non tax payers who stay non tax payers on receipt of their state pension will have no tax impact.
b) likewise anyone who are already basic tax payers and stay as basic tax payers with the state pension will have no tax impact on deferral

c) anyone who is a non tax payer prior to state pension and the state pension takes them into basic rate tax paying then deferring will have a negative impact.
d)likewise for anyone currently basic tax payers and move into higher rate on receipt of state pension will have a negative tax impact on deferral

The group in C will be the majority given the average occupational pensions. So, in simple terms, the 10% enhancement for deferring for one year will in fact be reduced to an 8% enhancement i.e. on the simple £600 extra from the example, it will be £480 extra per year for basic rate tax payers.

I'm happy to debate the topic with you but your approach loses my confidence in you persuasiveness when you use such manipulation of the numbers to make your point.

mgdavid

saver861 wrote: »

.......
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.........

Statistics! The above assumption doesn't necessarily hold up to scrutiny as most people have multiple jobs through their working lives and therefore many have multiple pensions. Half of pensioners have at least £5000 of private pension income. Around three quarters of pensioners own their own homes outright. The average income of pensioner couples is £34000 pa. (just some interesting stats from http://!!!!!!!.com/ns6uhuw ).
EDIT - can't use t i n y url apparently, and the link copy won't work for me so google The Pensioners' Incomes Series statistics - July 2014 - Gov.uk
It's my reasonable assertion that only people with an income more than the personal allowance will be considering SP deferment. Analysing a case where the SP straddles the PA is to my mind misleading and does show the problems with generalisations.

I do agree that each case should be reviewed on its merits, and people are free to use whatever emotional or irrational criteria they feel comfortable with in coming to a decision.

LXdaddy

I'm about to reach Normal Retirement Age but will continue working for a year or two. While I am working I will be a higher rate tax payer and willl drop to a basic rate tax payer when I start taking my work based pension.

I will certainly defer my state pension until after I actually retire. I always assumed that the deferal would be break even after about 10 years but for me there is certainly a benefit in moving the income from a time when I pay higher rate tax to when I pay basic rate.

saver861

mgdavid wrote: »

Statistics! The above assumption doesn't necessarily hold up to scrutiny as most people have multiple jobs through their working lives and therefore many have multiple pensions. Half of pensioners have at least £5000 of private pension income.

Is that not comparable with my point that the average occupational pension is around £6000 meaning most people will straddle the personal allowance on receipt of state pension? Otherwise I am missing something obvious.

mgdavid wrote: »

It's my reasonable assertion that only people with an income more than the personal allowance will be considering SP deferment. Analysing a case where the SP straddles the PA is to my mind misleading and does show the problems with generalisations.

It is not misleading to the many whose income straddle the personal tax allowance on receipt of state pension, my missus being one of them. My occupational pension is above the personal allowance but my missus might well assume she would get the same deal from deferral that I would. The reality is she will get a lesser deal than me - another fact thats buried in the detail.

mgdavid wrote: »

I do agree that each case should be reviewed on its merits, and people are free to use whatever emotional or irrational criteria they feel comfortable with in coming to a decision.

Yes thats paramount. There are two parts to these things: 1. Ascertain the facts. 2. Apply those facts to your personal circumstances.

saver861

LXdaddy wrote: »

I'm about to reach Normal Retirement Age but will continue working for a year or two. While I am working I will be a higher rate tax payer and willl drop to a basic rate tax payer when I start taking my work based pension.

I will certainly defer my state pension until after I actually retire.

Yes in such cases deferral is a no brainer, as they say.

LXdaddy wrote: »

I always assumed that the deferal would be break even after about 10 years

I think many people think the same. Many also think break even is 10 years from retirement date, when break even is at least eleven years from retirement date for a one year deferral. Add in other aspects and that break even date can go up by a few years.

jamesd

saver861 wrote: »

You state that either the only non tax payers are those supported by others who are likely to be tay payers anyway.

What I wrote is that those deferring had to fund deferring some way and that I expected that to take savings or support from another person.

saver861 wrote: »

Somewhat opposite to my point, based on the average occupational pensions in public and private sectors being less than £7,000.

I used this income level. The Pensioner's Income Series gives the average pensioner unit (single or couple, combined average) as £212 a week combined, £11,024 a year.

saver861 wrote: »

But in my example I used the figure of £6,000 as being close to the current state pension for those with 30 years. You have increased that figure to £9,880 as being the potential someone could get in state pension currently. That is an extreme exception as you well know and thus skews the tax figures.

The current state pension after 30 years is not about £6,000. That current basic state pension portion is £5,881.0 but there is also the earnings-related part that you chose to ignore. I didn't ignore the earnings-related part, instead I used the low earner current system final state pension value, including all of the earnings-related part for a full working life as a low earner. A low earner is not an extreme example. The higher end of the current range is about £250 a week or £13,000 a year. The higher number doesn't affect the tax rate for deferral at all, it's still 20% on all of the deferral increase.

saver861 wrote: »

c) anyone who is a non tax payer prior to state pension and the state pension takes them into basic rate tax paying then deferring will have a negative impact.

The group in C will be the majority given the average occupational pensions.

Occupational pensions on average make up just 27% of pensioner income, the state benefits 44%, earnings 17%, investment income 7% and personal pensions 4% in 2012/13 according to the Pensioner's Incomes Series (page 6).

On page 7 that document also has the 2012/13 actual state pension levels for individuals and couples. It was £133 a week for single pensioners and £201 a week for couples. Note that the single average includes those not getting much pension, notably housewives. It's not the average for those who had a normal working life.

saver861 wrote: »

So, in simple terms, the 10% enhancement for deferring for one year will in fact be reduced to an 8% enhancement i.e. on the simple £600 extra from the example, it will be £480 extra per year for basic rate tax payers.

The increase is 10.4%, not 10%. So the after basic rate tax increase will be 8.32%.

saver861 wrote: »

I'm happy to debate the topic with you but your approach loses my confidence in you persuasiveness when you use such manipulation of the numbers to make your point.

You really should reconsider correcting the inaccurate numbers you're using for both incomes and the increase due to deferring, which is 10.4%, not 10%. You might also reconsider the bogus claim that what I'm doing in my more correct calculations changes the tax effect of deferring, since both my numbers and yours cause all of the deferral income to be taxed at basic rate, meaning there is no tax effect difference.

You're focusing on irrelevances: the tax makes no difference in the break even time because whether using the numbers you used or the more realistic ones I used the income from deferring is all taxed at basic rate. I simply corrected the inaccuracies in your break even calculations by doing things like not decreasing the deferral gain from 10.4% to 10%.

The core answer is easy: a man who defers at 65 for one year can expect to have a 4.2% higher after tax state pension income than one who doesn't, even after allowing for the lost income from the year of deferring over the remaining life expectancy. This gain continues at slowly lowering levels for each extra year of deferral. The gain is higher for a woman because the number of years remaining is higher. If the person lives longer than average life expectancy they get the whole deferral benefit, not the 4.2%, because they no longer need to pay for the deferral year(s) income.

jamesd

saver861 wrote: »

Many also think break even is 10 years from retirement date, when break even is at least eleven years from retirement date for a one year deferral.

Break even is 10.4 years. You got it to be 11 by cutting the increase from 10.4% to 10% in your calculation.

saver861

jamesd wrote: »

Break even is 10.4 years. You got it to be 11 by cutting the increase from 10.4% to 10% in your calculation.

10.4% is the correct increase figure that is not in dispute. For simplicity I have used rounded figures throughout.

Let me see if I can summarise your position as the length of the posts are starting to look like war and peace.

Its 10.4 years to the break even point.
If you live beyond this break even point you are in profit.
There are no tax implications regardless in relation to deferral either before or after break even.
The decision is thus down to health and if you are in good health then deferral is the better option.

Have I got that about right?

jamesd

Not quite no tax implications, but that's close enough for typical incomes, either all within the personal allowance or already at basic or higher rate.

saver861

jamesd wrote: »

Not quite no tax implications, but that's close enough for typical incomes, either all within the personal allowance or already at basic or higher rate.

James my man... I think the difficulty here is I put forward one scenario and you counter with a different circumstance.

Keeping this as simple as:

My good mates Joe and Bill - they both have £4,000 taxable income at state pension age. Their state pensions have been calculated at £6,000 each (taking all issues into account, service, serps etc) The personal tax allowance is £10,000.

Joe did not defer and his income with his state pension is right on the personal allowance limit, but he pays no tax. Bill on the other hand, deferred and his income is £10,624. Bill is £624 over the personal allowance so he has to pay tax on it, i.e. £124.80.

I'm not clear whether or not you saying that situation cannot occur?