State Pension Deferral

jamesd

Using that situation and assuming it continues, Bill spends £6,000 of savings to get the same £10k spending money as Joe during the year of deferral. Bill has an extra £499.20 a year of after tax income. In this case 6000 / 499.20 = 12.02 years break even assuming Bill had the savings invested to deliver inflation growth tax free.

Trouble is, that ignores the inflation linking of the increase. If Bill really took the money out of savings he was probably getting less than inflation in interest, so his break even time drops. If he was investing instead it could be higher than both the 10.4 and 12 years levels because he also has to catch up with the investment growth.

A much more common scenario is something like a still married housewife who didn't work much and has 30 years and no additional state pension or other income at all, ending up with just the basic state pension paying her £113.10 a week, £5,881.20 a year. If she defers for a year her pension goes up by £611.40, all well within the personal allowance and tax free, so her break-even time is 5881.20 / 611.40 = 9.62 years.

Given normal life expectancies both cases are winners for deferring because the person is likely to live about twice as long as the break even time.

I think there is also one case where deferring for a year at 65 might have a longer break even time than normal life expectancy: £100,000 of income. There's a marginal income tax rate of 60% starting at that point.

That state pension situation can occur, say if Joe and Bill both spent long times in prison, on unemployment benefit or as a house husband not working but receiving child benefit, so they have very little earnings-related state pension. Or they might have worked at low pay in a contracted out defined benefit pension for many years.

It's also possible for the tax split you described to happen but very unlikely that it would continue. The triple lock effectively guarantees that it can only happen for one year. To last longer than one year the personal allowance would have to increase each year by the triple lock amount and that's unlikely. Most likely is that Joe gradually sees some of his income taxed at basic rate. Triple lock is the higher of 2.5%, inflation or average earnings. Average earnings is usually about 1% above inflation and the personal allowance is unlikely to continue to increase at a rate above inflation long term, even though it has done during the current government.

I don't disagree with you about it being possible, it's just unlikely. I agree with you that it's worth each person checking their own situation.

saver861

jamesd wrote: »

I don't disagree with you about it being possible, it's just unlikely. I agree with you that it's worth each person checking their own situation.

Straddling the tax allowance scenario does therefore have implications. The housewife who stays a non tax payer has no tax implications.

I think we have near exhausted this. In many ways the issues are down to semantics. The real issue on this is whether you live beyond the break even point or not and, I think, the relevance of the money at the later stages of retirement.

My understanding is that the deferral rate will change to less than 6% in 2016, in which case it will be somewhat less attractive and probably much easier to make a decision

By the way, on theme with semantics, 10.4% makes it 10.6 years to break even and not 10.4 years (disregarding all other issues).

kidmugsy

For many people the decision might turn on the guess that inflation will stay low for some years and then roar away. Then deferring could be hugely profitable. Nobody knows, but it might be perfectly rational to insure against rising inflation be deferring.

saver861

kidmugsy wrote: »

For many people the decision might turn on the guess that inflation will stay low for some years and then roar away. Then deferring could be hugely profitable. Nobody knows, but it might be perfectly rational to insure against rising inflation be deferring.

Well I'm not sure we would have other problems to worry about if inflation did suddenly soar away like that.

Regardless of any opinion on how long break even takes, at 5.8% the new rules would be so far to break even, that itself will deter most people I would imagine.