Deferred Pension "Hot Spot"?

jamesd

uk1 wrote: »

[/I]My point was that it is better to get your total deferral percentage increases of 10.4% per year on £115.95 for the rest of your life than on £113.10 which it would be the week before. You seem to be saying that this is the worst option which confuses me.

All that happens if she takes it a week earlier is that she gets one week at the lower level and then goes up to the higher level. If we ignore the extra 0.2% for the extra week of deferring.

So early case: gets 113.10 then a week later it goes up to £115.95.
Late case: doesn't get the 113.10 payment but a week later gets £115.95 (still ignoring the 0.2% for the extra deferral week).

uk1

jamesd wrote: »

All that happens if she takes it a week earlier is that she gets one week at the lower level and then goes up to the higher level. If we ignore the extra 0.2% for the extra week of deferring.

So early case: gets 113.10 then a week later it goes up to £115.95.
Late case: doesn't get the 113.10 payment but a week later gets £115.95 (still ignoring the 0.2% for the extra deferral week).

James I am still clearly missing something. Forgive me.

If she has exactly five years of deferral by taking it the week before she would surely get £113.10 plus 52% of £113.10p for the next week and then £115.95 per week plus 52% of £113.10p for the rest of her life the £115.95 being increased by the triple lock for as long as that promise is kept and the other bit increasing by CPI.

However if she takes it a week later it will be £115.95 plus 52% of £115.95% (ignoring the extra week) for the rest of her life the £115.95 being increased by the triple lock each year for as long as that promise is kept and the other bit (£52% of £2.85 higher) increasing by CPI.

This means that she benefits by ((£115.95-113.10)*.52% each week increased by CPI each week for the rest of her life just by taking it at the start of the next tax year. In other words she is better off by £2.85 per week increased by CPI for taking it a week later for the rest of her life.

No?

Jeff

greenglide

This means that she benefits by ((£115.95-113.10)*.52% each week increased by CPI each week for the rest of her life just by taking it at the start of the next tax year. In other words she is better off by £2.85 per week increased by CPI for taking it a week later for the rest of her life.

Yes - I "think" that is what I meant as well:-)

jamesd

uk1 wrote: »

No?

No. You're assuming a difference in something that doesn't really exist but I'm too tired at the moment to reliably take your calculations apart and sort out where. Maybe this evening if someone else doesn't beat me to it.

LXdaddy

uk1 wrote: »

Can you make your point using actual figures based on the example I gave please.

Thanks.

Let's be clear I am agreeing with you that it is better to start taking your state pension later rather than earlier. There is a 0.2% improvement each week. AND as you have been pointing out basing the EXTRA Pension on a higher level of basic state pension is also a benefit. BUT the benefit is not necessarily as high as you calculate.

Using your figures - 5 years deferral to April 5th, Basic State Pension on April 5th £113.10, Basic State Pension after 5th April £115.95

The difference between £113.10 and £115.95 is 2.5% - the effect of the triple lock.

If you start drawing pension on 5th April the Extra pension will be £113.10 * 260 * 0.2% = £58.81 So first week pension will be £171.91.

If you start drawing pension a week later the Extra pension will be £115.95 * 261 * 0.2% = £60.53 So the total would be £176.48


The option of drawing pension on 5th April would have the following on the following week...
Basic State Pension £115.95 + Extra Pension of £58.81 increased by CPI%.

The actual value depends on CPI % as follows
0.0% £58.81
0.5% £59.11
1.0% £59.40
1.5% £59.69
2.0% £59.99
2.5% £60.28

So IF CPI is 2.5% then the only difference between the two dates is the impact of the extra week of deferral. If however CPI is zero then the difference is £1.71 - about 1% of the total pension amount.


Bear in mind the cash flow impact as well. The drawing on 5th April gave you £171.91 which you don't have by deferring the extra week - so the value of that cash in hand also reduces the benefit slightly.




So there IS a benefit but not quite...

In other words she is better off by £2.85 per week increased by CPI for taking it a week later for the rest of her life.

uk1

LXdaddy wrote: »

So IF CPI is 2.5% then the only difference between the two dates is the impact of the extra week of deferral. If however CPI is zero then the difference is £1.71 - about 1% of the total pension amount.


Bear in mind the cash flow impact as well. The drawing on 5th April gave you £171.91 which you don't have by deferring the extra week - so the value of that cash in hand also reduces the benefit slightly.

So there IS a benefit but not quite...

I am still a puzzled.

The current pension amount is known and the pension we will get on April the 6th is known. CPI is irrelevant. It is a straight choice of 52% of the lower figure or 52% of the higher isn't it? 52% of £2.85 (the difference) is £1.48 paid for the rest of life and increased by CPI. I am confused as to why it might be different to this when all factors are known. I cannot see how the figure can be anything other than £1.48 per week more and then increased by CPI thereafter. This would be 20 years times 52 weeks x £1.48 ie £1539.20. This small bit will never go down but will increase by CPI.

Is that correct? If so isn't that worthwhile waiting a week was my question?

Jeff

jamesd

LXdaddy might have identified a real difference relating to the inflation treatment of the basic state pension portion on which the increase is calculated. I think so.

The deferral increase grows always at CPI but the BSP grows at the higher of 2.5%, CPI or wages. If either of the other two is higher than CPI then there might be a benefit in the delay.

This is moot for the Additional State Pension portion because ASP also increases at CPI, just like the deferral increase.

So to calculate the possible benefit you need to know the two inflation rates and the split of the original pension between BSP and ASP.

If CPI is the same as or higher than 2.5% and wage inflation there would be no difference.

But don't take this as gospel because I really do need that sleep.

jamesd

uk1 you might try calculating for these cases:

BSP 90, ASP 30. No GRP.

case A: CPI 2.6%, wage inflation 2%, triple lock 2.5% alternative.
case B: CPI 2.4%, wage inflation 2%, triple lock 2.5% alternative.
case C: CPI 2.4%, wage inflation 2.6%, triple lock 2.5% alternative.

LXdaddy

uk1 wrote: »

I am still a puzzled.

The current pension amount is known and the pension we will get on April the 6th is known. CPI is irrelevant. It is a straight choice of 52% of the lower figure or 52% of the higher isn't it? 52% of £2.85 (the difference) is £1.48 paid for the rest of life and increased by CPI. I am confused as to why it might be different to this when all factors are known. I cannot see how the figure can be anything other than £1.48 per week more and then increased by CPI thereafter. This would be 20 years times 52 weeks x £1.48 ie £1539.20. This small bit will never go down but will increase by CPI.

Is that correct? If so isn't that worthwhile waiting a week was my question?

Jeff

CPI is not irrelevant. The Extra Pension payable in the last week of "this year" is increased by CPI for the first week of "next year". Even if you have only taken the state pension in the last week of this year.


So in the general case of considering taking the pension in the last week of this year or the first week of next year the differences in the extra pension are...
261 weeks worth next year's base
vs
260 weeks worth of this year's base INCREASED by CPI


The CPI factor does have an impact on what is payable next year if you start drawing pension this year. If CPI is the same as or higher than 2.5% and wage inflation there would be no difference. (as jamesd said)




This is really an academic debate because you will have a higher figure if you take it a week later. We are only discussing the size of the difference.

uk1

James sorry for mixing your name on the earlier post with Dave!

I am wide awake but even though I got A level English and you are extremely talented in making the unfathomable understandable over many years I am more confused. There is nothing you can do about that. It is an unavoidable state!



Jeff