deferring state pension?

Loughton_Monkey

There is another alternative of deferring for a lump sum. This pays 2% over base (so 2½%), which is up to 1% more than you can get elsewhere.

It's no 'gravy train' or major 'giveaway', but when you have no need at all for the cash it's a no-brainer, especially when however large the sum becomes, it will never take you into a higher tax bracket when you take it.

kidmugsy

KathysBoy wrote: »

Its set out in the Social Security Administration Act 1992.

If you say so. But my memory is that divorcing the inflation-linking of additional pension from that of the basic pension was introduced in an Alistair Darling budget while Brown was P.M.

kidmugsy

tangleteeth wrote: »

married women's stamps ... that's yet another mis-sold pension scandal

Really? Who sold them to her?

saver861

johnaka wrote: »

if I were to defer my s/pension by 1 year just to gain an extra £613.10 a year,it would take roughly 9 years to get back £5881.20.which

This is one issue that many deferring are not fully aware. It will take 10 years and 8 months from your retirement date to recoup the unclaimed year. Many are mis-reading this as getting the gain from '9 years or so' thinking they are going be having a better pension deal from age 74 (if retiring at 65).

Deferment at 10.4% can be a good deal but the main checks to be aware of:
- Break even is 10Yrs 8 months from retirement date
- If the deferred increase takes you from non tax-payer into basic rate tax paying then the break even point will be longer.
- If you did not defer and invested your first year pension for the 10 years to break even then the break even would be even longer still.

So its quite possible, rather then getting the benefit of the increase from age 74 as some are thinking, it might be somewhat closer to age 80. That still can be a good return depending on your life span but thats the calculated decision.

kidmugsy

saver861 wrote: »

- Break even is 10Yrs 8 months from retirement date

Break-even is 9-and-a-bit years from restarting the pension.

That's by far the best way to think of it because it covers people who defer for different periods, and who defer after first having started the pension.

saver861 wrote: »

If the deferred increase takes you from non tax-payer into basic rate tax paying then the break even point will be longer.

And if it takes you from paying tax on all the pension to paying tax on only some of it then the break even point is even closer.

saver861 wrote: »

If you did not defer and invested your first year pension for the 10 years to break even then the break even would be even longer still.

And if your investment would have lost money the break even would be even shorter still.

The main problem with considering deferral, as revealed on these boards, is that many people grossly underestimate average life expectancy for people in their sixties and so underestimate the likely benefit of deferring.


The best reason to choose not to defer is this sort of thing: "1 kidney removed through cancer.no body in my family have lived beyond 73 years." If you have objective reason to think you'll die much sooner than the average, deferral looks a poor bet. The key word is "objective", otherwise people will just produce pseudo-rational excuses for doing what they want to do on whim.

saver861

kidmugsy wrote: »

And if it takes you from paying tax on all the pension to paying tax on only some of it then the break even point is even closer.

I'm not sure where you are coming from here - an increase in income will not reduce you tax burden! Peeps have been trying to figure out ways to do that since taxes began - ain't none found it yet - not legally anyway!

kidmugsy wrote: »

The main problem with considering deferral, as revealed on these boards, is that many people grossly underestimate average life expectancy for people in their sixties and so underestimate the likely benefit of deferring.

It will always come down to personal circumstances and health will be one of the major factors in determining the validity of deferring.

I think it will be a somewhat mute point anyway - 5.8% will answer the question easier for most and by the time the rest of us get there that bird will have well and truly flown ....

kidmugsy

saver861 wrote: »

I'm not sure where you are coming from here - an increase in income will not reduce you tax burden!

No, but retiming income will. Consider someone working for £15k p.a. who decides not to start his State Pension at 65. Had he accepted it, he'd have had (say) an extra £6k p.a. taxed at 20%.

Then he stops work one 5th of April, having arranged to start his state pension within a few days. His bigger state pension is (say) £7200 p.a.. Since his other pensions add up to only £3000 p.a. he gets his state pension (and the others) tax-free. Bingo - a big win for him.

saver861

kidmugsy wrote: »

No, but retiming income will. Consider someone working for £15k p.a. who decides not to start his State Pension at 65. Had he accepted it, he'd have had (say) an extra £6k p.a. taxed at 20%.

Then he stops work one 5th of April, having arranged to start his state pension within a few days. His bigger state pension is (say) £7200 p.a.. Since his other pensions add up to only £3000 p.a. he gets his state pension (and the others) tax-free. Bingo - a big win for him.

I think your calculator needs it's batteries changing ...

If he has a £6k state pension deferred for a year at 10.4% it will be an additional £624 i.e. £6624 when he starts taking it and not £7200.

If someone is working until 66 its likely they will have somewhat more than £3,000 occupational pension!

Anyone can create a scenario to match some figures and there will be some rare situations, but I think you are somewhat off beam there ....

jamesd

While the person is deferring they do not have their state pension income. This means that they can use their personal allowance for other things, like taking out around £10,000 tax free each year from their personal pension pot, on top of the usual tax free lump sum.

In kidmugsy's case the year of deferring has saved 20% income tax on the £6,000 of state pension in that year, £1,200 of income tax not paid.

Now after deferral the state pension would have increased from £6,000 to £6,624 plus the usual inflation-related increase. Since that's still below the personal allowance the person is better off for life by that initial saving of £1,200 of income tax and also by the increase in state pension.

The net state pension not received was 80% of £6,000, £4,800. £4800 / £624 = 7.7 years to break even, ignoring the potential investment returns and the inflation-linked increases in the £624 each year.

£3,000 of income at 3% with RPI increase takes around £100,000 in a pension pot to buy at an annuity rate of 3%. That's well in excess of the typical pension pot size.

Kidmugsy's case was pretty generous, most low earners won't have accumulated a hundred thousand Pounds in their pension pot.

jamesd

johnaka wrote: »

in another post by jamesd..
Did you know that from state pension age a person can defer their state pension and that it will be increased by 10.4% for each year it's deferred? That's way more than any possible mortgage interest saving and it lasts for life. It's also inheritable by a spouse, most of it. Your wife can get this deal. You can't, because you reach state pension after state pension age you're on a lower 5.8% not inheritable deal if you defer.
please can you explain this..
if I were to defer my s/pension by 1 year just to gain an extra £613.10 a year,it would take roughly 9 years to get back £5881.20.which I could have claimed and saved if not needed.
according to the gov-web it stated that any extra state pension counts as extra income and taxable.
this seems to me will wipe out any gains you have made by deferring.if I read it right.

The increase is taxable, which means that you'd pay 20% income tax on that £613.10 if all of your personal allowance is used by other income.

Say you have a mortgage at 5% interest rate and in ten years there'd still be more than £5,581.20 owed on it, then you plan to clear it with another lump sum. So for at least ten years you're saving that 5% on the £5581.20 initial overpayment with a lump sum. That's £5581.20 * 0.05 = £279.86 of interest a year that you'd have to pay from after tax income.

Compare that £279.86 mortgage interest to the £613.10 pre-tax, £490.48 after basic rate tax increase in the state pension from deferring.

For the first ten years while you still have the mortgage you have an extra, after mortgage interest, income gain of £490.48 - £279.86 = £210.62. Plus the inflation-linked increases in the pension. Once the mortgage is gone you go back to the full £490.48 gain.

You also have to allow for getting back the £5881.20 gross, £4,704.96 from deferring the pension for a year. After the ten years you'll have had extra income of £210.62 x 10 = £2,106.20 so still £2,598.76 to go. With the full £490.48 now the mortgage is gone it takes just 5.3 more years. So after 15 years you have extra income of £490.48 plus the inflation-linked increases that you wouldn't have if you'd overpaid the mortgage instead.

Typical life expectancy for men aged 65 is around age 88 or so, so that deferring choice is usually a very good deal. A couple more years for a woman.

What really happens is that the increases in the deferred state pension due to inflation mean that you end up able to overpay more with the money and get to break even and ahead time faster than in the basic calculations I've used, You probably aren't really paying 5% mortgage interest either, and since this is long term planning you might just go for a ten year fix at maybe 3%.

So what deferring the state pension does is make most people significantly better off compared to mortgage overpaying.

In your wife's case she's planning to stop working in a year or so if I remember correctly, and I think that her total income will then be less than her personal allowance, so all of the state pension increase will be tax free. That significantly cuts the time it'll take for her to break even and get ahead.

For this year when she's still working she'd still have the net missed pension income of £4,704.96. But then she'd get the whole gross annual increase from the state pension of £613.10. Deduct the £279.86 mortgage interest and that's £333.24 extra disposable income a year. After ten years it's £3,222.40. £4,704.96 - £3,222.400 = £1,482.56 left after ten years. With the mortgage gone and the whole £613.10 available it's just 2.4 years to go until break even. Again ignoring the effects of inflation-linked increases.

So she and you are well ahead by deferring instead of using the state pension money to overpay on the mortgage. Unless she dies unusually young. She and you would probably be even more ahead by deferring for longer but the one year would be a good starting point.

If you could do it it'd be an even better idea to extend the mortgage to use more of her potential life expectancy, so you can free up more of the mortgage capital repayment money as well. Say planning to repay over 25 years instead of however long you have now. Regular mortgages may not let you do that but an equity release one could and you're not forced never to repay them, you do get to make repayments if you want to. End result is a good deal more money to live on over those years due to the reduced capital payment and potentially even longer deferring of the state pension to further boost her income, so you'd end up even more better off overall.