Deferring state pension

Noyem

If you reach State Pension age on or after 6 April 2016 but decide to defer taking your State Pension (SP) at your pensionable age, I am aware that the enhancement is that your pension, when you take it rises 1% for every 9 weeks it is deferred and that this amounts to an annual rise of circa 5.8%, but my question is, and is not answered at the government website...When you decide to start receiving your deferred pension - do you also get the pension you have not been taking as well as the enhanced pension from the point of take-up? If you don't it seems that if, say, you deferred for three years and only got the enhanced pension from the end of that three year deferment and not receive any of the pension you have not taken during that three year period that, taken into account ‘triple-lock’ annual rise at 2.5%, that it would take around fourteen years before the deferred SP income equals and overtakes what you would have received had you not deferred taking your pension. Anyone know the definitive answer - SP not previously taken plus the enhanced pension or just the enhanced rate SP from the point of take-up?

jamesd

You do not get paid the amounts you would have been paid if you had not deferred your state pension. You get a state pension that is increased by all of the usual compounded percentage annual increases since you started deferring plus the increase from deferring.

For those reaching state pension age before 6 April 2016 there was an option to take a lump sum instead of an ongoing increase.

The payback time is OK for those in normal good health with a typical life expectancy. A big part of the value of deferring is that the income si guaranteed and it is acting as a form of longevity insurance because it'll pay out for life. It's also a way better deal than an annuity for someone in normal good health.

Noyem

Thank you for that jamesd but it still leaves me with a question. If you do get what you have not been receiving during the deferment period how does an up and coming retiree, under the new rules receive it? Broken down and weekly? If so - broken down to what and over how many weeks? Take a three years deferred pension at say, currently, £130 per week and triple-lock rising 2.8% yearly. At the end you would have not taken 52 x £130 + 52 x £133.25 and + 52 x £136.58 = a total, not taken SP value of £20,791.16. So do you get this in a lump sum or broken down into weekly payments and bundled together with your now enhanced SP of pension of £154.90 per week (£130 + 2.5% triple lock rise per year, plus 5.8% deferred increase per annum). If so - over how long. Maybe I'm thick but I don't see how it works and am not convinced you get this 'not previously received' SP bit at all. Going by the gov.com site it looks like you only get the enhanced SP from the point of take-up. If so your start with an enhanced weekly SP but you are down nearly £21K from the outset.

Linton

Just the enhanced rate from the point of take-up. This is the then standard rate increased by the calculated %. You dont get repayment of the pension you deferred. Also note the the enhanced element isnt triple-locked, its just CPI.

I havent done the calculation but 14 years payback time could well be correct. 14 years is significantly less than average life expectancy - the ONS figures show a male 65 this year with a predicted average age of death of 88, 91 for a female . So on average deferring for a small number of years is a good deal.

Linton

Noyem wrote: »

Thank you for that jamesd but it still leaves me with a question. If you do get what you have not been receiving during the deferment period how does an up and coming retiree, under the new rules receive it? Broken down and weekly? If so - broken down to what and over how many weeks? Take a three years deferred pension at say, currently, £130 per week and triple-lock rising 2.8% yearly. At the end you would have not taken 52 x £130 + 52 x £133.25 and + 52 x £136.58 = a total, not taken SP value of £20,791.16. So do you get this in a lump sum or broken down into weekly payments and bundled together with your now enhanced SP of pension of £154.90 per week (£130 + 2.5% triple lock rise per year, plus 5.8% deferred increase per annum). If so - over how long. Maybe I'm thick but I don't see how it works and am not convinced you get this 'not previously received' SP bit at all. Going by the gov.com site it looks like you only get the enhanced SP from the point of take-up. If so your start with an enhanced weekly SP but you are down nearly £21K from the outset.

You are down £21K at the outset but make it all back and more by the time you die (probably).
Rather than pay for 3 years SP out of your own pocket an alternative is to spend the £21K on an annuity. This would give you something like £600/year compared with over £1000 a year from deferring.

I see you are using a figure of £130 for SP. For someone reaching SPA after April 5th this year a full pension is actually £155.65. If you reached SPA before April this year you get an enhancement of 10.4% annually which is a truly wonderful deal rather than merely good..

Noyem

Thanks again jamesd. The £130 is actually based on my Dec 2015 SP statement, which said £123 per week. It is this low because bum advice had me contracted of SERPS. My private pension growth is not good so I have no hope of reaching the £155.65 with both pensions combined. Anyway, the £130 figure comes about by including the April 2016 and the expected April 2017 (circa 2.5%) rise. Lasting fourteen years to just break even is quite a gamble. I think I shall take the SP as soon as I can next year and think a bird in the hand is worth two in the bush.

bowlhead99

Noyem wrote: »

Lasting fourteen years to just break even is quite a gamble. I think I shall take the SP as soon as I can next year and think a bird in the hand is worth two in the bush.

It's not very uncommon to live 14 years after state pension date though. Life expectancy for someone who's already got SP age is quite a bit more than 14 years, (even more so for women). So, you could flip it round and say "it's quite a gamble" to *not* defer and have to live on that smaller pension forever.

One way of looking at it is the govt is willing to give you a pension of x, but if you are greedy and want the "bird in the hand" a year or two earlier they will only pay you y, and you miss out on the extra money that they'd have been happy to give you, forever.

If you can afford to defer for a year or three until that later date, it's a pretty decent return. If you die early, you won't miss the money too much as you'll be dead. While if you die later, you'll be very happy to be getting a pension that's z% higher for ever and ever (well, could be 40 years).

At least, those are the arguments I used when convincing my Mum to defer. Though she was pre April 2016 so the maths was much more in favour of deferring. It's no longer a no-brainer but as James says it's a great insurance policy against having a long life. Whether that's a long healthy life or a long unhealthy one, things are better with a bigger income.

xylophone

What is the situation with your private pension?

Noyem

Thanks for your input bowlhead99. I think with the private pension pay-outs being so low I may have to take the SP, but anyway feel that if I need to get to age 79 (65 + 14) before a three year SP deferment becomes a gain, that it is just too much of a gamble and, at that age, even with good health will it be worth the wait. I surely will not have car or holiday expenses to contemplate, so it might only go to pay for some home I'll be in!
xylophone - The Department of Work & Pensions believe my SERPS private state pension will provide me a COPE (Contracted Out Pension Equivalent) figure of £90 per week. My private pension providers last statement gave a fund value of circa £27K. Quite how you get a return of £90 a week on that amount will need some magic I feel. I'll bet I'll be lucky to get an annuity paying £5 per week, based on current rates. My private pensions have been quite a problem to me with FA saying this and selling me that only to then disappear or provide total silence. I have been advice to switch on numerous occasions without really knowing if I was doing right or wrong. Others advisors have discharged themselves from providing me services once I have challenged them on documents given them rights I have not previously given that pertain to them having control over my total wealth, not just my pension(s). I just haven't a clue - so will not sign up to stuff we have not discussed or agreed to previously. I am quite backward regarding pensions and have really been taken to town by some FA and IFA's - all of whom I totally distrust. The government pushed SERPS and I followed like a lamb to slaughter and now will not even receive the basic State Pension amount despite having 43 years NI qualifying years.

jamesd

Noyem wrote: »

Thank you for that jamesd but it still leaves me with a question. If you do get what you have not been receiving during the deferment period how does an up and coming retiree, under the new rules receive it? Broken down and weekly? If so - broken down to what and over how many weeks? Take a three years deferred pension at say, currently, £130 per week and triple-lock rising 2.8% yearly. At the end you would have not taken 52 x £130 + 52 x £133.25 and + 52 x £136.58 = a total, not taken SP value of £20,791.16. So do you get this in a lump sum or broken down into weekly payments and bundled together with your now enhanced SP of pension of £154.90 per week (£130 + 2.5% triple lock rise per year, plus 5.8% deferred increase per annum).

You never get the £20,791.16 in any explicit way. What you get is the £154.90 a week instead of the £136.58 a week from when deferring ends.

The increase is really 22.69% after three years with 2.5% compounded a year and 5.8% not compounded a year. So the £130 would become £159.50 with deferral or £140.00 without deferring.

Noyem wrote: »

If so - over how long.

For the rest of your life.

Noyem wrote: »

am not convinced you get this 'not previously received' SP bit at all. Going by the gov.com site it looks like you only get the enhanced SP from the point of take-up. If so your start with an enhanced weekly SP but you are down nearly £21K from the outset.

That's how it works.

jamesd

Noyem wrote: »

The Department of Work & Pensions believe my SERPS private state pension will provide me a COPE (Contracted Out Pension Equivalent) figure of £90 per week... My private pension providers last statement gave a fund value of circa £27K. Quite how you get a return of £90 a week on that amount will need some magic I feel. I'll bet I'll be lucky to get an annuity paying £5 per week, based on current rates.

Don't be a victim. Buying an annuity pays much less than the state pension deferral for a person in normal good health.

Taking £130 a week that means you need to draw £6,760 a year while deferring to match the state pension you're not taking, ignoring the annual increases for convenience. Your £27k would pay for 3.99 years of that deferring income level, call it four for convenience. So you spend the 27k to live while deferring and at the end the deferral has bought you an increase of 4 x 5.8% = 23.2%. 23.2% of £130 is £30.16 a week. Way better than the £5 a week for the annuity (which might be a level annuity instead of one increasing with inflation).

I did ignore the £5 a week that the annuity would pay from the start and that matters a bit. Four years of £5 a week takes £1,040 to pay for. That cuts the time you can defer by about 15% of a year or roughly £2.17 a week. So a more accurate benefit from deferring vs annuity gets you £27.99 a week, or £22.99 a week more than you'd get from the annuity.

Noyem wrote: »

now will not even receive the basic State Pension amount despite having 43 years NI qualifying years.

Contracting out has no effect at all on the basic state pension level. It is impossible to contract out of that unless you were a married woman paying the reduced stamp level. The only part you could contract out of was the earnings-related portion, SERPS then later S2P.

How many more years until you reach your state pension age? You get an increase of 1/35th of the flat rate level for each extra year until you reach the roughly 155 a week level/cap on it. A person who wasn't contracted out reaches that cap sooner than one who was and ends up working with no more state pension to gain than someone who contracted out. that's why those who contracted out are normally winners from the flat rate pension system and their decision to contract out.