Transfer drawdown to State pension top up

kidmugsy

xylophone wrote: »

If your wife defers her state pension and has no income at all apart from what you give her, (and her non taxable DLA) she can use the £2880 in/£3600 out pension loophole?

https://forums.moneysavingexpert.com/discussion/5226030

Yes. Also, I've cooled on the idea of Mrs deferring (or at least on her doing all the deferring). Logic: Mrs doesn't pay tax on her pension at the moment, but will eventually if she survives her spouse. If Mr survives Mrs then he will pay tax on his inherited Extra Pension. In other words, in the long term tax will have to be paid on (part of?) Mrs's Extra Pension. So it's not very efficient for her to defer. Whereas if Mr defers, he is deferring taxed pension and later getting taxed Extra Pension, so there's no loss of tax efficiency. So the best idea might be for Mr to defer, meantime filling and emptying personal pensions for Mrs to use her personal allowance. (They could always use ISA money to fund that little merry-go-round.) That would seem to be the best bet, in the absence of my having any knowledge of the life expectancies of the couple.


Note that if Mr's initial deferral consists simply of not drawing the pension at age 65, then after starting the pension he retains the right to defer a second time (for example, should they receive a windfall e.g. a surprise inheritance). Similarly, if such a windfall were received before the end of March '17, they could additionally buy a top-up for Mrs.

kidmugsy

stubtoe wrote: »

The point I was trying to make was that to get 'value' from deferral you have to survive for a certain number of years to be in a better position than if you simply took state pension at 65

His alternative was buying an annuity, so your point carries no weight.

Anyway, whether annuity or pension deferral, he would be buying insurance against their running out of money in old age. You might as well claim there's no point paying for fire insurance since there's no guarantee your house will burn down. I think "mindless" is pretty reasonable. By all means use "lacking in critical thinking and analytical rigour" if you prefer.

stubtoe

kidmugsy wrote: »

You might as well claim there's no point paying for fire insurance since there's no guarantee your house will burn down.

Did I say that?

kidmugsy wrote: »

I think "mindless" is pretty reasonable. By all means use "lacking in critical thinking and analytical rigour" if you prefer.

You're quite aggressive aren't you. If you lambaste other newbie posters in a similar manner, well, I can only assume you want to turn this into the 'kidsmugsy' show. Well done. :T

kidmugsy

stubtoe wrote: »

You're quite aggressive aren't you.

The original poster had obviously given his position considerable thought. Then you arrived to patronise him by making a rather silly point. I confess I didn't like that. Nobody else patronised him; just you.

stubtoe

My utmost apologies to the OP then if he felt I patronised him. I honestly didn't intend to do so.

Still, I feel that's no excuse for you to use the language and attitude you have in your posts directed at me...

kidmugsy

OP: there's another opportunity. In this new tax year a non-taxpayer can transfer part of her Personal Allowance to a spouse who pays 20% tax. That's worth a couple of hundred a year.
https://www.gov.uk/marriage-allowance

One last (?) thing. If your ISAs include cash ISAs they are likely to be earning lower interest rates than you could make by having your wife hold one or more high-interest current accounts.

olly50

I wasn't aware of the £2880 in/£3600 out personal pension saving. I'll definitely give it a go.
I do have some savings outside of the ISAs, which are all in my wifes name to save tax on interest, I generally have 3 to 5 year fixed savings, arranged so that a chunk matures every year.
We are both age 64 and in reasonable health.
I have just registered for the marriage allowance to save £212.
Looks like the deferral would be best on my state pension rather than my wifes.
I am certainly glad I started this thread, looks like it will save me £932 p.a. plus the deferral decision - Many thanks to all thread contributors.

jamesd

stubtoe wrote: »

it would take you 10 years before you even broke even compared to simply taking state pension at 65 due to the income you have NOT received. A bird in the hand is worth two in the bush and all that...

So, what is the typical probability of dying within ten years from age 65 for those defer their state pension?

The alternative in this case was buying additional state pension with a lump sum that would deliver 5.84% on the purchase price instead of 10.4%. So very crudely, a 10.4 / 5.84 * 10 = 17.8 years life expectancy requirement for break even. What is the typical probability of dying within 18 years for those who buy a lump sum increase in their sate pension?

Of the two choices that olly50 was considering, which appears to deliver the greater benefit given the income and probability of dying before break even?

In both cases the money is inheritable by a spouse, mostly. What is the probability of the household being worse off, that is, of both partners dying before break-even?

You probably don't know, so to help the discussion, the Office for National statistics provides some numbers. The relevant numbers for death rates per year per thousand people are:

age 60-64: 9.6 male, 6.1 female
age 65-69: 14.3 male, 9.4 female
age 70-74: 24.5 male, 16.0 female
age 75-79: 40.7 male, 28.1 female
age 80-84: 73.2 male, 53.3 female
age 85+: 162.4 male, 143.7 female

So as a very rough estimate, (5 * 14.3 + 5 * 24.5) = 194 males per thousand might be expected to die within ten years of age 65, 19.4%. I ignored increases during the periods so that's an understatement but it still gives a reasonable idea. For a woman it would be 12.7%. So the probability of both dying in the period is very coarsely 12.7% of 19.4% which is 2.5%, though I have reservations about that.

Now, the government has published tables showing the chance of living to be 100. Using age in 2011 for males it was 9.5% at age 60, 8.7% at 65, 8.2% at 70. For females 14.5% at age 60, 13.4% at 65 and 12.6% at 70.

As a very rough summary, we can say that the chance of one person not breaking even is roughly similar to their chance of living to a hundred and that for two people with inheritance it's much lower.

As an alternative you suggested not making the purchase. Since the deferral rate pays 10.4% inflation-linked income increase, it appears that retaining the money would allow options such as drawing on it for income for a bit under ten years to match the deferral income, then dropping back to no increase. Or half the increase for maybe twenty years. Assuming that the money is invested at low risk and matches inflation in growth during that time.

Still, there is another option available: buying term life insurance. It's dirt cheap for those in normal good health at the ages we're considering, so that can be purchased to eliminate the chance of dying worse off. I'll leave it to you to either research it or dig up my old posts. Of course the reason its' dirt cheap is clear: the death rates are low.

Of course you're right that the money is spent and not available but that can be rectified by investing some of the income to replace the capital expenditure.

Alternatively, the capital could be wholly retained and the purchase financed by borrowing, say with an equity release mortgage. Again, I'll leave you to compare equity release mortgage rates to the deferral increase rate and discover that it's profitable to take the mortgage to buy the income and pay the mortgage out of the increased income.