Deferral of State pension

archie17

I recently retired in Feb 2016 when I was 65, my wife is 62.
We were concerned about how we would cope financially.
Fortunately we have managed to save 45k cash and have that in three Santander current accounts.
I also have three pension pots amounting to about 350k.

I have deferred my State pension, in February I was informed that this was £249 per week.
This was a surprise as I thought I had contracted out during my career.

My wife's State pension is projected to be £137 per week (May 2016 projection). We will purchase 5 years Class 3 stamps to reach this ammount.

I am attempting to get financial advise on what to do with my pots and have given my details to possible IFA. I have not been in any rush as we have sufficient income coming in from various sources. Tax rebate etc. Also we have my mother in law living with us and she contributes to the household. This could end at any time due to her age.

My cash flow shows me that I will be short of £500 per month from August onwards.

I could take my State pension and have surplus funds; but miss out on 10.4% p.a. increase.
Alternatively I could spend cash until we sort out what to do with the pension pots.

I am waiting for the EU referendum result before making any financial changes to the pension pots.

Any advice?

xylophone

You became 65 in February- a state pension of £249 a week indicates that you were contracted in to SERPS/S2P for much of your career.

What makes you think that you were contracted out? Have you checked that there has been no error?

archie17

Yes you are correct I was paying SERPS etc.
As I said it was a pleasant surprise as I thought I was going to get £119 per week.

xylophone

Your wife no longer has any employment income or other income?

archie17

My wife has a small pension £100 per month.
Our income is

• Repayment of loan from Children - helped with house purchase - 4 years left
• "Rent" from mother in law. - less than £7000 pa
• Carers Allowance

We hope this will continue until my wife receives her State pension in four years

jamesd

Assuming that you're in normal good health, defer for at least five years, up to ten. That deal for deferring is great. But there is a constraint for your situation, there's a cap on how high the state pension is allowed to get, if I recall it's around £280 a week, so that'd be when you'd stop.

You're both aged between 55 and 75 so you should both be making contributions to personal pensions because that can get you an extra 720 a year if you have unused personal allowance, less if you don't have any unused.

Have a look at Drawdown: safe withdrawal rates for some tips on how to plan a sustainable drawdown rate for pension pots and savings. Unless you know you have limited life expectancy use at least 40 years for planned life expectancy. The cfiresim post is the key one to use for planning how much to take.

General plan for your sort of situation is to take the tax free lump sum from a personal pension and shift that money into ISA investments. Then take taxable money from the pension up to the threshold of the higher rate income tax range even if you don't need that much, because that maximises your gain from having unused personal allowance while deferring the state pension. As with the tax free lump sum you'd look to reinvest the money that you're not allocating to spending, ISA first so it continues to be tax free.

There's some tax planning you can do to eliminate the basic rate tax liability if that interests you. Given your total assets it appears that you can comfortably invest enough to greatly reduce your tax liability. I rather like the Albion Venture Capital Trust for this because it uses asset-backed investing and pays out about 10% tax free a year, split into two parts each half year.

To pick the pension(s) to use for that you'd need to check whether any of them have any special benefits like a guaranteed annuity rate or guaranteed minimum pension. Then you'd pick at least one that has no such guarantee. For any with a guarantee you'd check how the terms compare to the 10.4% you can get from state pension deferral.

kidmugsy

archie17 wrote: »

I recently retired in Feb 2016 when I was 65, my wife is 62.
We were concerned about how we would cope financially.
Fortunately we have managed to save 45k cash and have that in three Santander current accounts.
I also have three pension pots amounting to about 350k.

I have deferred my State pension

(i) It would probably be wise to continue deferring your State Pension for several more years.

(ii) You have an entitlement to nearly £90k of TFLS from your pension pots. It might be wise to take enough each year to let you both fill ISAs.

(iii) You would be wise to drawdown enough income from the pension pots to let you use your Personal Allowance for income tax viz £11k p.a. If you don't need all that income use the surplus to fill high interest regular saver accounts for you both. Further, your wife can transfer part of her unused Personal Allowance to you so that your PA will effectively increase to more than £12k p.a.

(iv) as jamesd said, your wife especially should be making pension contributions. If she puts in £2880 net p.a. she can then draw out a £900 TFLS plus £2700 taxable p.a., but actually untaxed because she won't have used her Personal Allowance. This merry wheeze can continue even after she starts drawing her State Retirement Pension.

(v) Yes, using your emergency cash for a couple of months until you've acted on your pension pots would seem to be reasonably harmless, though I don't see why sorting out your pension pots should take more than a month. Still, best not to be stampeded into action that you might prefer to ponder.

(vi) Broadly, you look to me to be in a pretty favourable financial position once you have decided about your pension pots. Because you have the old-style SRP your wife should inherit a decent bit of it after your death. (At least that's my assumption: open to correction.) At your death there should still be a good sum in your "pots"; your wife will inherit that too as long as you have nominated her to the providers, and will be able to draw down income tax-free (if you die before age 75) or taxed as income (if after 75).

kidmugsy

Afterthought: the onset of your wife's pension will roughly coincide with your children finishing repaying you: that's convenient. If your wife is eventually widowed she may well become an income tax payer; that argues against her deferring her own SRP. Also, as a new-style SRP it will get markedly inferior terms to your deferral.

archie17

Thank you all for your replies I will study your suggestions - I am sure I will have some more questions

saver861

jamesd wrote: »

Assuming that you're in normal good health, defer for at least five years, up to ten.

As always, deferral discussions usually centre around the 10.4 returns, which in itself is a good as you are ever going to get, hence the drop to the much reduced rate from 2016.

Less consideration is applied to the practicalities. Deferring for 10 years would seem a pretty optimistic option. Said person would be at least 85, if not more, before reaching breakeven, depending on individual circumstances.

If you die early you lose - but if you have a partner they lose too. Not deferring and stashing it means it is there for the partner in the event of earlier death.

In addition, consider the 'value' of the money in your late 60's as opposed to your late 70's or 80's. No doubt many will still be alive and kicking beyond the breakeven point, however, clearly many will also be in deteriorating health where the 'value' of the money past breakeven might not be as beneficial as it would have been in earlier better health circumstances.

These are not reasons 'not' to defer, but are points to consider in making a decision.

jamesd

Those points should be considered but it's not just about break even on the state pension:

1. the higher guaranteed income means more money can be taken in drawdown from other resources while maintaining the same success level and the same or higher minimum income specification.
2. the extra state pension money works as longevity insurance, protecting in the long life case.

For those who are in the old state pension system most of the increase from deferral is inheritable by a spouse. Life insurance is another option that can provide protection if more of that is needed.