Deferred Pension "Hot Spot"?

uk1

greenglide wrote: »

It is the fact that part is uprated by triple lock and part by CPI which gives the difference so you cannot make that assumption. After uprating (April 11 this year?) a larger amount has been uprated by triple lock.

Thanks, understood.

As I said, I'm really not going to give up until I at least have a response that is (a) technically accurate and correct and (b) I understand it. At the moment the inappropriate presumption/assumption in fact defeats my whole point. She is seeming to say to me "you are incorrect because I have ignored your exact point" sort of thing.

I have attempted to write a response several times but I am not impressed with my own attempts, so if anyone is is sufficiently interested in the topic to help me with a cogent reply designed to produce a wriggle-free reply from them to winkle this out I'd appreciate it.

One named case worker is working with me at the Pensions Advisory Service on this so it should be productive - eventually.

Thanks.

Jeff

LXdaddy

uk1 wrote: »

I'm restarting this thread to share exchanges I have been having with the Pensions Advisory Service. The exchanges so far have been:

My question is ....... are they correct. In all detail including the 2.9% increase? Seems wierd to me so I am now even more confused. Perhaps the part I have boldened and underlined is where their calculation is why the reply is incorrect and in fact is the heart of the issue?

If not I'd appreciate help with composing a further reply, and in return I'll share the reply here.

Jeff

So Jeff you "borrowed" some of my language in your follow-up to the PAS - that saved me getting in touch to do the follow up - so here's what I think the next round would be...


Let's compare the case of someone deferring for 104 weeks and taking their pension which is worth £150 per week in 2015/16 against someone with the same pension deferring for 104 weeks ending in 2016/17


So let's break down the £150 in 2015/16. That is £115.95 basic plus £34.05 additional pension. For 2016/17 the basic will go up by triple lock 2.9% to £119.30 and the additional by CPI (0%) to £34.05 making the 2016/17 total before any Extra Pension £153.35.


Comparing the two options... the person who starts drawing in 2015/16 gets 20.8% extra pension on £150 = £31.20 total £181.20. As this person moves into 2016/17 the £31.20 extra gets increased by CPI (0%) and added to the £153.35 making the total £184.55.


By comparison the person who starts drawing in 2016/17 (after deferring for the same 104 weeks) gets 20.8% extra pension on £153.35 = £31.90 total £185.25.


The difference between the £184.55 and £185.25 is what you have referred to as the result of the "hot spot".

uk1

Thanks LXdaddy, yes I did .... and thanks for the additional help. In fact I impatiently presumed that this topic had become boring to all and had as a result prematurely and impatiently did my best and composed a response and sent it.

If you are short of interest hop straight to the second example which is simpler.

Thanks for your patience XXXXXX,

I think the problem is that you have ignored in the example the different treatment of the deferred amount ie "As you can see there is no difference. I have assumed in that example that the whole pension is increased by 2.5% whereas in practise part would increase by the triple lock and part by CPI."

I have taken two different people and what they would both get on the first week of the new tax year. One person has in fact taken their deferred pension the week before, and the second person has waited a week and taken their new pension a week later. I have then taken off the increase that is due solely to waiting for a week ie the extra reward for deferrment of 0.2% per week. In your view this would then leave zero because it is the same. In fact I believe it is different. I have used your number to see what would be paid on the first week of the new tax year firstly by someone who had deferred until the last week of the previous year and then someone who had simply waited a week.

The person deferring in the last week of the year using your example would have a basic pension of £150 plus the £31.20 deferred pension making a total as you say of £181.20. Next week the basic pension is increased by say 2.5% under triple lock but the extra pension would not be increased as CPI is zero. So at the start of the next (new) tax year the total pension payable would be £154.85 plus exactly the same additional (deferred) pension of £31.20 as the previous year making the total payment £185.55.

However by waiting the extra week the basic pension will be £154.85 but the deferred pension would now be £32.41 instead of £31.20 an increase of £1.21 because it is applied against the new increased pension making a total payment of £186.76.

It is the £1.21 difference ie £186.76 minus £185.55 I have been looking at. This figure is made of two elements. 31p is simply the extra deferral of 0.2% per week but that leaves 90p and not zero and is a reward for waiting one further week and having the deferred pension paid on the higher increased triple locked pension of £154.85 rather than £150 of the previous week. It is a profit for waiting rather than simply the extra weeks deferral. The extra 90p reward for simply waiting a week is an additional £47.05 per year and will be increased every year by CPI.

Is my reasoning correct and if so does this not make taking the deferred pension one week into a new tax year rather than the last week of the old a "hot spot" as suggested in my original email, because in this example it is essentially 90p extra per week uprated for the rest of life for "free". Well as a reward if you get my drift.

Thanks

We then had some further exchanges where my philosphy was questioned so I tried a simpler scenario and calculation.

Lets assume a deferral of 1 year and then one year and one week but then take off that extra week to see the benefit of simply delaying it to have the deferral applied to the new pension ie "The Hot Spot" benefit.

If his basic state pension for whatever reasons would be £100 on 30th March 2016 then the deferral percentage would be a simple (for one year) at 10.4% ie £10.40. This would make a total pension of £110.40 In the following week his basic state pension will increase but his deferred will not and so his total pension will be £102.90 plus £10.40 ie £113.30

As we said, if there was a 2.9% increase under triple lock the following week the the basic pension would be £102.90 and the deferral would then be 10.4% plus 0.2% ie 10.6% making the deferred pension £10.90 So the new pension would be £113.81 an increase of 51p. But the element of this increase due to deferring a single week is simply £102.90 at 0.2% for the week ie 21p. So the other 30p ie 51p - 21p is due solely to waitng for a week and having the deferral uplift applied to the newly increased state pension. This would be "The Hot Spot" benefit.

Does this make sense?

I hope when you read it I have my logic and maths correct as I am useless.

We are still progressing and In fact the person I am dealing with still seems to disagree with me and I'd presume therefore that I have made an error. However we have had several very friendly exchanges during today and this has resulted in the person sending me their source spreadsheet for me to look at and play with "at my own risk". I have looked at it and I am really concerned about it as to me it does seem to contain some basic logic errors with respect to how the calculations are made. Being a sensisble bloke I must presume that I am wrong and they are right. I think it unfair to post some of these but I have sent back my opinion of where there are errors and I'll let you know the results.


Jeff

uk1

Just to finally resolve and close this off once and for all. To recap, The Pensions Advisory Service is the organisation that appears on the Governments pensions pages and downloadable documents. It is the organisation that appears at the end of the governments own downloadable pdf on "Deferring Your State Pension". So it was to them that I went to to check that my point about the Hot Spot was correct.

All the way through the many exchanges - they were courteous and prompt and often many each day - their seemed a lack of awareness that the Extra State Pension from deferral should be thought of as seperate pension from the Basic State Pension when increased each year. Their spreadsheet rolled the extra pension into the Basic State Pension against which they were applying the triple lock which this year should be 2.9%.

Having suggested a telephone conference, I persevered and this morning there was a breakthrough. I have convinced them that they were wrong and they have thanked me for persevering and changed their spreadsheet and confirm that there is indeed a Hot Spot. That is a result I guess.

I am perplexed that instead of receiving guidance I provided coaching and teaching to the Government about their own pension schemes.

They suggested a chat over the phone and these were the last two exchanges this morning.

Thanks XXXXXX,

I think the issue I am making is simple and all I will be doing is repeating it. After you have calculated the increase in pension in your spreadsheet you are adding it into a single consolidated Basic State Pension and calling Basic State Pension and then increasing all of it by 2.9%. My understanding is that this approach is incorrect. You must keep the additional deferred part of the pension seperate ie "Extra State Pension" and increase it only by CPI and not the triple lock.

Here is the DWP document:

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

"After you claim, your extra State Pension will usually increase every year with inflation (based on the Consumer Price Index)".

[FONT=&quot]I think I now understand the point you are making. [/FONT]

[FONT=&quot]Before deferring you have two pension elements i.e. Basic State Pension and Additional State Pension. After deferring this is joined by a Third Element EXTRA State Pension that will only increase by CPI in future.[/FONT]

[FONT=&quot]I have amended the spreadsheet to present the information to reflect this and hopefully this is the point you were making.[/FONT]

[FONT=&quot]If it is then it is clear that there is a clear advantage to deferring until 6 April which probably prove the point you are making.[/FONT]

[FONT=&quot]I have attached the revised spreadsheet. I have also added a dropdown so if you want it won’t show the advantage of the extra weeks deferral.[/FONT]

[FONT=&quot]Please confirm whether this is the point you were making and that the spreadsheet is achieving what you expected it to. Thank you for also persevering.[/FONT]

[FONT=&quot]By the way the spreadsheet is the property of TPAS and should not be distributed.[/FONT]

At last but I am really concerned at the lack of knowledge I have encountered in the place that I had presumed would understand the most basic detail of the pesnions they are advising the public about. What else is it that they do not understand and are misinforming about?

Thanks to all that helped. I hope the Hot Spot idea is helpful and of interest.

Jeff

LXdaddy

Jeff,


So let's break it down another way to confirm some basic assumptions and ask a series of specific questions.


1. Is it true that when a deferred pension is taken, the extra calculated on the pension they would have on the date of drawing the pension, rather than the pension that the person would have had at the date of deferral?

2. Is it true that basic pension increases by triple lock, the highest of 2.5%, increase in average earning, and CPI?

3. Is it true that Additional Pension (eg from SERPS) is increased by CPI? [note we will see later that this is not actually significant]

3. Is it true that Extra Pension (ie from a period of deferral) is increased by CPI?

4. For those with a state pension age before April 2016, is it true the extra pension is calculated as 0.2% for each complete week deferred (with a minimum deferral of 5 weeks)?




I believe the answer to each question is TRUE.

If 1 is FALSE then the whole debate is wrong, any increases earned in the period of deferral are ignored so the only variable becomes the period of deferral. So we would stop now.


In the original answer from PAS they said that the only difference was the number of weeks of deferral, the pension payable in 2016/17 would be the same if deferring 100 weeks and starting payment before April as deferring 100 weeks and starting payment to after April.

If however all answers are TRUE lets look at this contention. We need to use some algebra so apologies to less mathematically inclined readers.

Defining some variables and establishing the relationship between them...

B15 is the basic state pension in 2015/16
B16 is the basic state pension in 2016/17
T ..is the triple lock increase due in April 2016 (ie 2.9%)

B16 = B15 * (1+T)

A15 is the person's additional pension in 2015/16
A16 is the person's additional pension in 2016/17
C ..is the CPI increase due in April 2016 (0%)

A16 = A15 * (1+C)

Consider two scenarios...
a) start drawing the pension in 2016/17
b) start drawing the pension in 2015/16

W ...is the number of weeks of deferral

In scenario a) start in 2016/17
Xa16 is the extra pension payable in 2016/17
Pa16 is the total pension payable in 2016/17

Xa16 = (B16 + A16) * W * 0.2%
Pa16 = B16 + A16 + Xa16



In scenario b) start drawing in 2015/16
Xb15 is the extra pension payable in 2015/16
Pb15 is the total pension payable in 2015/16

Xb15 = (B15 + A15) * W * 0.2%
Pb15 = B15 + A15 + Xb15

Xb16 is the extra pension payable in 2016/17
Pb16 is the total pension payable in 2016/17

Xb16 = Xb15 * (1+C)
Pb16 = B16 + A16 + Xb16



If there is no difference (other than the impact of extra weeks which we have removed by using the same W) then Pa16 should be the same as Pb16

Back to algebra...

If Pa16 = Pb16 then
B16 + A16 + Xa16 = B16 + A16 + Xb16

subtract the common + B16 + A16
Xa16 = Xb16

substituting for Xb16
Xa16 = Xb15 * (1+C)

substituting for Xa16 and Xb15
(B16 + A16) * W * 0.2% = (B15 + A15) * W * 0.2% * (1+C)

divide out the * W * 0.2%
(B16 + A16) = (B15 + A15) * (1+C)

expand the right hand side
B16 + A16 = B15 * (1+C) + A15 * (1+C)


substituting for B16 and A16
B15 * (1+T) + A15 * (1+C) = B15 * (1+C) + A15 * (1+C)

subtract the common + A15 * (1+C) [note this indicates that the increase in added pension has no bearing on the debate]
B15 * (1+T) = B15 * (1+C)

divide out the common * B15
1 + T = 1 + C

subtract the + 1
T = C

substitute actual values for this year
2.9% = 0%


This is UNTRUE therefore Pa16 IS NOT the same as Pb16 so the two scenarios are not the same.


In years where triple lock is greater than CPI there IS an advantage to drawing a deferred pension after the increase in April.

uk1

It does state that the pension is calculated based on the pension whehn you take it not when you could have taken it.

Why not ask them and come back and post the reply.



Jeff

David.s_2

Surely it depends on how long you live. If you defer for a year you get 10% (approx.) uplift. If you are below the tax threshold then it will take you 10 years to break even, after that you are gaining 10% on each pension payment received. If you pay tax the break even point is longer than 10 years, so how long do you expect to live? Look at your parents & grandparents and medical history and the crystal ball. If, for example, you defer for 5 years, the uplift would be 50% (on the old rules) and you would be 50% better off after the break even point. But, how long do you expect to live? The break even point is still at least 10 years away from the point where you start to receive your pension. As it is index linked (at least to some extent ??) it is a simple calculation to find the break even point.
The new uplift for deferment is going to be less than 10% per year I hear. Also a consideration.

uk1

David.s wrote: »

Surely it depends on how long you live. If you defer for a year you get 10% (approx.) uplift. If you are below the tax threshold then it will take you 10 years to break even, after that you are gaining 10% on each pension payment received. If you pay tax the break even point is longer than 10 years, so how long do you expect to live? Look at your parents & grandparents and medical history and the crystal ball. If, for example, you defer for 5 years, the uplift would be 50% (on the old rules) and you would be 50% better off after the break even point. But, how long do you expect to live? The break even point is still at least 10 years away from the point where you start to receive your pension. As it is index linked (at least to some extent ??) it is a simple calculation to find the break even point.
The new uplift for deferment is going to be less than 10% per year I hear. Also a consideration.

David,

Sorry for being thick, but what question are you answering exactly?

David.s_2

Just making the point, why worry about a few pence at the starting "hotspot". If you don't live long enough you will do better to take the money as soon as it becomes available. There is a break even point after which you gain but it's 10 years at least to reach that point.

LXdaddy

David.s wrote: »

Just making the point, why worry about a few pence at the starting "hotspot". If you don't live long enough you will do better to take the money as soon as it becomes available. There is a break even point after which you gain but it's 10 years at least to reach that point.

David this thread is about specifically deferring for a few weeks across the April increase. If someone is deferring and THINKING about starting to draw their pension at the end of March would it be better to delay for one or two weeks more and start drawing later in April.


The OP suggests that there is an advantage to doing so for the small number of weeks. There will obviously be a further 0.2% uplift by deferring each week which needs to be weighed against the fact that you didn't get your pension paid in any of the weeks that you deferred.


But the current discussion relates to a rather technical point that the calculation of the new pension is higher if starting after April than it would be if you start before April and then have it increased in April by the annual increase.