Stopping state pension: does the 10.4% extra apply

altitude

My wife is 67 and has been receiving her state pension for 7 years. At the time she started taking it we appear to have dropped a bo**ock and did not defer claiming the pension.
I now know that she could stop claiming the pension for a few years so she can earn some extra pension.

My questions are:
1). Does the same extra payment of 10.4% per year exactly as if the pension had been defered from the start?

2). I have read on this forum that the benefit of deferment only applies for 3-5 years, so does this mean that as she is 7 years down the line deferment would be inadvisable?

Any thoughts gratefully received.

kidmugsy

(1) Yes.
(2) If she's in fine health and from a long-lived family, it's probably worth doing. Five years might be a bit too far: maybe two or three?
(3) You could also mull over the wisdom of buying 3ANICs when they become available in October: a contribution of around £20k would buy an extra £1300 p.a. of State Retirement Pension.

https://www.gov.uk/deferring-state-pension/what-you-may-get

https://www.gov.uk/government/publications/additional-state-pension-top-up


P.S. How well index-linked these extra pensions will be I don't know. Currently you can expect CPI-linking. For the future, consult Mr "Krystal" Balls.

altitude

Many thanks for this - very helpful.

3). I was recommended 3A NICs by a friend, then I began to think an investment where both the interest and return of capital are taxed sounds like bad news.

When searching for extra £25 week pension I found a rather good telegraph article. It appears that ignoring tax a 65 year old would need to live to 82 to see positive return. Average life expectancy for 65 year old is approximately 87. So OK in theory.

However when 20% tax is taken into account then a 65 year old would need to live to 88. This doesnt take into account the 50% possible inheritance, so maybe still just about a reasonable idea.
But for anyone paying 40% tax then it would seem to be a definite no, unless they live to 100!

jamesd

Yes, the 10.4% is based on the date when state pension age was reached, so it applies. You'll end up inheriting some of the gain, perhaps 50-70%, it varies, if you outlive her.

The number of years that makes sense that I give is based on remaining life expectancy and so that I can have high confidence that relatively few people will die before at least breaking even. It's not a strict measure but rather based on knowing the rough death rates. Her starting at an older age would reduce the number of years that makes sense but not necessarily eliminate the gain.

She's still young enough for a few years of deferring to be a good deal if her health is OK. If it's good rather than just OK and she's reason to expect a long life expectancy more would make sense. It's also worthwhile to consider that some of it can just be viewed as insurance against a long life, to guarantee income.

The income increase beats typical investment returns and is way more than annuities so as long as there is no desire to preserve capital it's a good deal still. Even if there is a desire to preserve capital, deferring and buying life insurance is one way to go. Another is to combine that for the early years until break even with investing some of the increase.

kidmugsy

altitude wrote: »

When searching for extra £25 week pension I found a rather good telegraph article. It appears that ignoring tax a 65 year old would need to live to 82 to see positive return. Average life expectancy for 65 year old is approximately 87. So OK in theory.

However when 20% tax is taken into account then a 65 year old would need to live to 88. This doesnt take into account the 50% possible inheritance, so maybe still just about a reasonable idea.
But for anyone paying 40% tax then it would seem to be a definite no, unless they live to 100!

They're certainly not designed for high income pensioners. The "average" life expectancy means they're better for women than men.

As for the break-even age, that depends on the inflation rate you assume, and the inflation-protection. If, say, there were a burst of 70s-like inflation ten years from now, and if inflation protection remained as a CPI link, then they'd look sparkling value.

Whisper it quietly, but for some people there will be an IHT gain because they can gift away surplus income free of IHT without any complications. There's also the point that as one gets older, and more prone to muddle, and more likely to be a target for theft, there may be an advantage in having extra income rather than extra capital.

It's pretty much like an annuity, an insurance against outliving your capital, but on much better terms than a commercial annuity provider can offer.

P.S. It's also an insurance against the return of higher inflation during the recipient's remaining life.

bigfreddiel

altitude wrote: »

My wife is 67 and has been receiving her state pension for 7 years. At the time she started taking it we appear to have dropped a bo**ock and did not defer claiming the pension.
I now know that she could stop claiming the pension for a few years so she can earn some extra pension.

But oth she has had seven years worth of income so you need to factor that into your calculations

Cheers fj

kidmugsy

bigfreddiel wrote: »

But oth she has had seven years worth of income so you need to factor that into your calculations

Not really; that's water under the bridge. The necessary calculations now are only about the future.

bigfreddiel

kidmugsy wrote: »

Not really; that's water under the bridge. The necessary calculations now are only about the future.

We'll it may be in the past, but it would be a useful analysis to see how your finances may have been had you differed for seven years. Has the income been invested or spent? If spent was it on essentials or treats?

Cheers fj

altitude

I think all make some great points. I think what I will take away from this is to stop wife's pension for perhaps 3 years (she is super fit) and also defer mine (age 64.8) for the same (I am male and less healthy, with lousy genes).

Due to the 40% tax I think we will pass on the 3A NICs.

In terms of making me feel better about the past decision the investment angle is rather nice as we have effectively invested in tracker funds which will probably have together earned over 20% over the period.