MSE News: 'Second line of defence' for pension savers to be introduced

Triumph13

jem16 wrote: »

Am I missing something here?

£8510 index-linked income with a 2.5% increase each year would see the income at £8940 at the start of Year 3 which is when your 2 years deferred state pension would start which you say is £8928.

Isn't £8940 higher than £8928?

Now it's always possible that the annuity part doesn't see any increase (although last 4 years it's been 1.2%, 2.7%, 2.2% and 5.2%) in that 2 years but the state pension will rise by at least 2.5%.

Assuming no annuity increase the least that would be got is £8915 so £13pa less.

All the numbers in my example are in today's money. If you are going to uplift the £8,510 for two years worth of inflation then you need to do the same for the £8,928.

jamesd

Triumph13 wrote: »

https://www.gov.uk/deferring-state-pension/tax-and-inheritance
This seems to say that the rules are changing and that if you reach SPA after April 2016 then the extra pension from deferral is no longer inheritable?

Thanks. Yes, the rules are changing, so the inheritance aspect won't exist under the new rules. Life asurance can be used to provide the benefit after that, if desired, though deferring for the spouse would probably be a better deal.

Linton wrote: »

Your reference is for the pre-2016 scheme.

Right. The one anyone who is deferring now has to use.

jem16

Triumph13 wrote: »

All the numbers in my example are in today's money. If you are going to uplift the £8,510 for two years worth of inflation then you need to do the same for the £8,928.

Would the inflation lift only happen to the original £8k or the whole lot?

jamesd

Triumph13 wrote: »

All the numbers in my example are in today's money. If you are going to uplift the £8,510 for two years worth of inflation then you need to do the same for the £8,928.

I do think that there's a mistake in your numbers that caused jem16 to mention 2.5% inflation. 8928 / 8500 * 100 - 100 = 5.03%. That looks a bit like 5% inflation. With two year deferral it should have gone up by twice 5.8% if that's the deferral rate that applies. So maybe you got that number wrong and understated the benefit of deferring vs the annuity?

jem16 wrote: »

Would the inflation lift only happen to the original £8k or the whole lot?

All of it. The calculation is done by first increasing the state pension to its inflation-adjusted value, then adding the extra as a percentage of that. From then on each portion increases with the appropriate guarantee level. If the triple lock is still around the base would go up by that while the increase would only go up with CPI. Unless that also gets changed.

The CPI state pension deferral part increase vs RPI annuity aspect can be significant in theory but the payout is so much higher than that offered by an RPI annuity that it's not something that is likely to matter.

jem16

jamesd wrote: »

All of it. The calculation is done by first increasing the state pension to its inflation-adjusted value, then adding the extra as a percentage of that. From then on each portion increases with the appropriate guarantee level. If the triple lock is still around the base would go up by that while the increase would only go up with CPI. Unless that also gets changed.

Thanks James.

Going back to your earlier figures using a £10k annuity pot - I assume that was after the tax-free lump sum was taken? So the actual pot started at £13.3k approx.?

I know you missed out the annuity income in the first year for simplicity. If it was used in the calculation to make sure you didn't have any less income in Year 1 than what you would have got with the non-deferral option, how long is the break-even point, if there is one, as you obviously had £2200 left over from the £10k?

jamesd

Pincher wrote: »

If it was indeed cost neutral, it means there is no point in deferring, because the pensioner gets the same overall.

Depends on the assumptions used to make it cost neutral. When I write about it I try to take care to always write "normal good health", which means I'm already selecting for the people who are likely to live longer lives than average.

For those who qualify for an enhanced annuity it'd depend on the relative rates but the lower life expectancy ones would be eliminated from the deferring pool by the higher enhanced annuity quotes.

Triumph13

jamesd wrote: »

I do think that there's a mistake in your numbers that caused jem16 to mention 2.5% inflation. 8928 / 8500 * 100 - 100 = 5.03%. That looks a bit like .5% inflation. With two year deferral it should have gone up by twice 5.8% if that's the deferral rate that applies. So maybe you got that number wrong and understated the benefit of deferring vs the annuity?

The £8510 is £8k of state pension plus the £510 of indexed annuity he could get at 3% if he went for the annuity option with his £17k.

£8k * 5.8% = £464. £8k plus two lots of £464 give you the £8,928 at today's prices that the £8k state pension would increase to if you deferred it for 2 years, living off the £17k in the mean time.

The choice is therefore either (I) give your money to an insurer and get an extra £510 a year for life on top of your basic £8k; or (2) live off the money for two years at £8,500 a year and get an extra £928 a year for the rest of your life.

jamesd

jem16 wrote: »

Going back to your earlier figures using a £10k annuity pot - I assume that was after the tax-free lump sum was taken? So the actual pot started at £13.3k approx.?

Yes, I just assumed that it had been taken, though it could be spent to buy income if desired, by using it to cover some of the income need while deferring. But I wouldn't do that at first glance because using taxable pension money first would probably be preferable due to lower taxable income level while deferring.

jem16 wrote: »

I know you missed out the annuity income in the first year for simplicity. If it was used in the calculation to make sure you didn't have any less income in Year 1 than what you would have got with the non-deferral option, how long is the break-even point, if there is one, as you obviously had £2200 left over from the £10k?

I didn't work that out. How abut you picking your preferred example and doing the calculations? It'd be particularly interesting if you think you've found a case near to state pension age where deferring looks like not being the best option in normal good health.

Some of the least favourable cases will be for a person who is going to pay higher rate income tax on the gain from the amount being deferred but who will stay in basic rate if they don't defer. Those probably won't be the smaller pot size cases that are of most interest here, but they could be, say for a public sector worker with modest non-work pension pot.

For this particular issue, the choice between annuity and deferring, I tend not to focus much on the payback time because both the annuity and deferring have the same issue and essentially the same calculation when we're looking at cases reasonably close to state pension age.

Payback time is much more interesting for the decision of whether to buy an assured income or not, whether that's annuity or deferring. I'm not keen on annuities but even I think that 5.8% might not be a bad deal compared to the oft-quoted 4% for drawdown. Though I think that drawdown can pay more than that if well managed according to current research, I do think that there is significant value to guaranteed income as an insurance product against market drop cases.

Triumph13

jamesd wrote: »

I'm not keen on annuities but even I think that 5.8% might not be a bad deal compared to the oft-quoted 4% for drawdown. Though I think that drawdown can pay more than that if well managed according to current research, I do think that there is significant value to guaranteed income as an insurance product against market drop cases.

This all comes down to risk tolerance and capacity for loss. I'm fortunate enough that our basic (fairly Mustachian) needs should be nicely covered by a couple of DB schemes and the state pension. If they weren't, then state pension deferral would be at the top of my list.
As it is, my DC pot is partly to fund early retirement without taking the DBs early, but the rest is all jam with an intention to leave some for the kids. In that situation the 4% 'safe' withdrawal rate isn't the right number to compare to the 5.8% deferral bonus. 4% is calculated on having a low chance of running out before you die with the assumption that if it does you starve. If you can afford to be more sanguine about it and vary your spending if the markets turn down then a better number to compare is the long run real returns on your investments plus getting to pass on the full capital as that is the expected average outcome.

Pincher

jamesd wrote: »

Depends on the assumptions used to make it cost neutral. When I write about it I try to take care to always write "normal good health", which means I'm already selecting for the people who are likely to live longer lives than average.

For those who qualify for an enhanced annuity it'd depend on the relative rates but the lower life expectancy ones would be eliminated from the deferring pool by the higher enhanced annuity quotes.

That's a disturbing thought. Just imagine all the people with good health deferring by two years, and actually live longer than average. Now, combined that with people with ill-health who do not defer. Both group have maximised their pay out, how can it not increase the state pension burden?


Effectively, you are taking advantage of the mis-pricing of state pension pay out, because they are not allowed to adjust your pay out based on individual life expectancy. You win, Treasury loses.


It's only an issue if this happens en masse, which is unlikely. Too many people who can't afford to defer out there.