Deferring a further year and/or Top Up ..etc

uk1

My wife and I are both 64.5 and I am due to retire September 2015 and we have deferred my wife so we retire on the same day. I'm 36 hours older than her. Roughly this will give her 4.3 years deferral. We will bother qualify for full state pension.


I'm considering the "top up" scheme and we have other pensions and savings that we could live on and we could defer retiring even longer and/or buy some top up.


Am I right in the generalisation that deferring is always going to be better value than top up and if I can do both top up is always going to be (likely) better than savings safely or cautiously invested?


Thanks.

kidmugsy

uk1 wrote: »

My wife and I are both 64.5 and I am due to retire September 2015 and we have deferred my wife so we retire on the same day. I'm 36 hours older than her. Roughly this will give her 4.3 years deferral. We will bother qualify for full state pension.


I'm considering the "top up" scheme and we have other pensions and savings that we could live on and we could defer retiring even longer and/or buy some top up.


Am I right in the generalisation that deferring is always going to be better value than top up and if I can do both top up is always going to be (likely) better than savings safely or cautiously invested?

I think that's a good approximation - it's certainly true for us. It must be possible, I suppose, to defer for so long that you might be better to start your pension (i.e. stop deferring) and buy 3ANICs. They are, however, only available until the end of tax year 16-17, and so they couldn't beat a deferral for you. For your wife it might be a tighter decision: I've seen suggestions that a five year deferral might be about the sensible maximum for a woman. Perhaps present ultra-low interest rates would extend that five year period. We are going the deferral route. We're older than you, and still my calculations say that deferral is the better bet. If we got a windfall maybe we'd buy 3ANICs too for my wife.

uk1

Thanks ... appreciated.

Just to make sure I understand your point, you are saying that you reach a point where the danger is if you defer it any longer then you simply don't have sufficient life expectancy left ....:)

My wife is more reticent for us to lose large chunks of capital, so simply delaying for another year might make better value sense as well as making more capital retention sense. It seems for example that 4 years more deferment theoretically costs the same as maximum top up but one gives you 40% more pension, the other £25.

jamesd

The top up scheme is not usually appropriate for people of your ages. Deferring gets you a larger increase for your spend than the top up does. The top up could be useful if something prevented deferring for long enough to get the extra money. The top up option gradually becomes better as a person becomes older.

While I'd normally write about a 3-5 year deferral for a woman that's in part based on the time at which the chance of dying starts to increase significantly. Actual break-even expectations work for longer deferring, but with ever-increasing chance of dying before break-even and not recovering all of the money spent.

It is possible to deal with the risk of death by buying term life insurance to cover the period until break-even. It's also worth knowing that most of the increase is inheritable by a spouse, subject to a cap on the total amount of additional state pension accrual from all sources.

What I suggest you do is work out a target guaranteed income and defer long enough to get to that, while using savings and investments to provide that income level in the meantime. This way you will in effect benefit from the higher income level while alive even if you were to die relatively early.

uk1

Thanks. Can you clarify what you mean by 305 years, as although she is ageing quite well, I suspect she might not last quite as long as that.

We're fortunate in that we do not need to set target income, we're just interested in optimising the use of savings and could delay the state pension for as long as makes "investment" sense.

kidmugsy

uk1 wrote: »

Thanks. Can you clarify what you mean by 305 years, as although she is ageing quite well, I suspect she might not last quite as long as that.

Typo: he meant "3 to 5 years".

The thing is, the 3ANICs get cheaper the older you are whereas deferral doesn't. In a sense they get more expensive, as the money forgone gets bigger in total, and so the opportunity cost of not having used it gets bigger. However, the deferral deal is so ludicrously good from your POV (and so ludicrously bad from the taxpayers' POV) that deferral will win in a comparison.

The 3ANICs might win another comparison, namely what else someone might do with a buckshee £20k or so. In a low-interest, expensive-assets world, they might seem an attractive cautious investment.

mgdavid

the dash is next to the zero
3 - 5

uk1

Many thanks to all.

I think the deferral is going to be the route as it is (a) the best return and (b) means we do not have the cliff-edge decision of an immediate capital loss. We can decide year by year for a year or two.

SnowMan

For a single male (with SPA 65) reaching SPA now, before 6th April 2016, I calculate the optimum period to defer state pension to be about 4 to 5 years based on the assumptions below.

This assumes
- no tax advantages/disadvantages to deferring (this will depend on individual tax positions)
- average UK population mortality (allowing for 2012 mortality improvement projections). I am actually assuming death to occur at the expectation of life at the age state pension is finally taken, with additional allowance for death in deferral.
- ignores the potential 3 months of payments on death while in deferment paid to the estate of a single person
- assumes investment returns on money foregone are in line with CPI price inflation

Deferring further and the gain rapidly decreases to the point where at about age 74 or 75 all the gain has been lost (that is you might as well have just taken your state pension from age 65). And defer after age 75 and you are worse off than not deferring at all.

Based on say £115pw of state pension being deferred, then the overall potential maximum expected gain (again based on the assumptions above) as a capitalised amount is around £17,000 (less tax on the extra payments so perhaps £14,000 if basic rate tax applies throughout).

Figures will be slightly different for people who are married (or in a civil partnership) because of the better death benefits, and slightly different for females

As you can see lots of assumptions there but it gives a general feel that deferring for 4 years (longer for females who started their deferral at a younger age than 65) might be in the ballpark of what is 'optimal' for the average person (reaching SPA before 6th April 2016).

But importantly nobody is average so it will very much depend on individual circumstances. For example for someone with health issues deferral might not even be a good idea (depending on the extent of their reduced life expectancy).

uk1

Many thanks.

As I get to grips with this I seem to forget the answers to simple questions I had previously understood. I have read the pdf but it confuses me more. So please indulge me a couple of clarifying recaps.

1. The 10.4% is applied to the pension you would have taken if you had retired "when you should have done" not the current higher one. So if it was £110 then but £120 now it is 10.4% of £110 not £120.

2. The spouse 50% goes to the surviving spouse even if they are collecting their own state pension in their own right ... and even if theirs had also been increased by deferral. So there are no disqualifiers.

3. The total pension when you take it including the deferred bit is all then increased when you start taking it by whatever the current increases are year on year.

Many thanks for the patience.

jamesd

SnowMan, it also needs to be compared to alternative income production methods. With the UK stock market average of 5% plus inflation, deferring at 10.4% plus CPI inflation looks like a good investment to provide guaranteed income for life vs drawdown. That'll hold until either the guaranteed need is met or until the return drops below the alternative investment option. Which it will do.