State Pension deferment philosophy ....

uk1

I'm struggling to find a rational way of working out how long further my wife and I should defer our state pension and I'm hoping that others might offer their own thoughts - however tangential - if they have struggled with the same problem or question.

We are on the old scheme. My wife's SP retirement date was March 2011 and my own was September 2015. We have enough savings to defer probably for as long as we want. You might have gathered we're both the same age having been born in September 1950, me being a couple of days older than my wife.

Obviously the longer you defer the less number of years you will collect the deferred pension. So there is a mathematical calculation. But if you aren't bothered by what amount you might leave in your will, you might just as well carry on deferring and building up a larger currently "inflation proof" SP . I calculate that by deferring to say April 6th 2018 over April 6th 2017 we increase our income by around £1.8k. I'm using a calculator I actually worked on with a Pensions Advisory Service employee a couple of years ago - a shame they won't release it for others to use. The only certainty is that we'll retire on 6th April in the retirement yearto hit the "hot spot" of deferring just after an increased SP figure which hopefully will continue. But which year?

You can't ignore the raw numbers about longevity etc, but the numbers seem to me to be simply one component in a much larger philosphical picture. But I can't focus clearly on what those larger philosophical considerations should be.

Any ponderings or thoughts greatly appreciated.

Thanks.

MyOnlyPost

We don't have an in built clock, no-one knows how long they have so the best we can do is guess.

Assuming current good health and no obvious facotrs (obesity, long term smoker etc) then the best I can come up with is how long lived were your parents and their siblings, what's the average life expectancy for your area, job type and income band. From this make a best guesstimate of your life expectancy and then crunch the numbers for which is financially the best taking into consideration the older you get the less you are likely to need

pafpcg

There's a discussion on how to estimate the optimum deferral length here (post #4 and then #8 onwards):

https://forums.moneysavingexpert.com/discussion/5515463

bouicca21

Another factor to consider is the possession of a lump sum to splurge as you wish whilst still healthy enough to enjoy the fun.

Linton

If your circumstances are appropriate the optimal number of years to defer a State Pension may have no connection with your longevity.....

Deferring can help with tax planning. You first extract the money from your drawdown pension as fast as you can without going into a higher tax band and put it into an S&S ISA. Then take the deferred SP. If you take the SP immediately you have less room to deplete the drawdown.

Another use of an enhanced SP later in life is that you can use fixed rate income such as from a generous Guaranteed Annuity Rate in the early years of retirement whilst building up the value of the index linked pension which can take over should inflation seriously reduce the value of your fixed income.

bowlhead99

My Mum is about a year older than you although she took her pension initially and then deferred it when 65. As you say, the key question is when do you start it up again and everyone will have views on that based on their own lifestyle and what would you do with the money when you eventually get it.

When we crunched the numbers in a very simplistic way, we came up with:

If you defer you get about 10% a year, so after a decade off, it will about double (ignore inflation as it's inflation linked so you can just think of the money in real terms).

So, if you take ten years off you have missed out on ten years money. But when you restart you are on double money. So over the ten years that follow the restart date you will get your old pension plus the same again in the form of extra pension, so you will make up those first ten missing years in the subsequent ten years of double money.

If you look at that against your lifespan. Say you defer taking pension from 65 to 75. Then spend 75 to 85 on double money, you broke even. If you die before 85 don't worry, nothing is lost, either your spouse or estate gets the money you missed, or your spouse chooses to have a nice boost to their own pension if they think that would be better for them. But if you live past 85, it's gravy all the way. Age 85 you are all caught up and on double money. Age 86? Double money. 87? Double money. 90? Double money.

Mid to late 80s corresponds to life expectancy for a lot of people. If you pass at that point (or earlier so spouse or family get the money) hey, break even, nothing lost. My mum's father passed ages ago in his late 70s, so that would have been a "nothing lost" case with the money going to his wife.

But her own mum is 100+ not out, which really brings home how long you are potentially going to want a nice income to be comfortable, whether it's for home comforts or care. That certainty of double income for a decade to "catch up" and then potentially two more decades on double money, if you need it - and if you don't, you're not around to complain - is psychologically very compelling.

People might think, "but what's the use of extra cash once I'm over my life expectancy anyhow. Rather have it now and go on holiday". Well, that depends on your circumstances and what kind of poverty lifestyle you would have to live in deferral.

For some people who can still take holiday now, because actually they don't need that state pension cash to be comfortable and do that travelling abroad or seeing friends around the country or buying a decent car every so often, there's no issue whatsoever because not getting the state pension is fine, they don't need it. For others, it's not so easy.

However for those for whom it might not seem like it's going to be so easy, it might still be pretty decent if they have other long term investments. The lovely big insurance blanket of being on a double state pension from your mid to late eighties and beyond, means you can pull forward some of the spending of those investments - if you kept them for later life they'll never deliver a return as good as a 10% a year inflation-linked spouse-inheritable annuity anyway, you are better off living on the investments now and deferring the state pension.

So, using that rationale we decided to (current plan at least) defer mum's pension from 65 to 75 putting breakeven at 85. In your wife's case if she deferred at 60 she could go back on at double money in 2021, age 70, and then by 80 she's in profit and 85 she's laughing and 90 she's positively giddy for the last ten years to her birthday card from the king and maybe beyond.

My Dad is no longer deferring because after taking a year or so off he thought he'd rather have the cash even though he didn't need It at all, as he'd completely misunderstood the details about inheritability and thought if he didn't take it, it might be lost (he's older than my mum, and figures he'll go first). Unfortunately after speaking to me and understanding it, he now can't defer again (having stopped and restarted once already).

But really you probably don't need to *both* defer if there are things you'd like to do right now with those thousands of pounds a year. For example if Mum outlives Dad and goes down to just her own income instead of a couple's income by her mid eighties, her own income effectively includes *two* state pensions because her decade off gave her so much enhancement - and she's comfortable. If instead Dad outlives Mum and goes down to just his own income, he gets to inherit her extra state pension so now *he* has two state pensions within his income and he's comfortable. So basically even with only one of them deferring for the whole decade, they get an extra pension between them to see one or both of them out.

The other advantage to deferring for longer, depending on your other sources of income, is that you might create unused personal allowance for the person who is deferring. My Mum is in that situation, as her employer pension doesn't use up her whole £11k (£11.5k from April) personal allowance on its own. So she has spare allowance to use up.

That means for this whole decade of deferring from 65 to 75, she can contribute to a personal pension (maximum £3.6k gross for a non earner), receive the allowable 'basic rate' gross-up from the tax man, and then immediately draw it out again: 25% tax free lump sum and the remaining 75% taxable but most of it fitting neatly into her personal allowance with no tax to pay. Result: enough free money for a very nice little holiday. Rinse and repeat every year for a decade.

Couple of things to wrap up this long post:

Obviously, it's a very valuable investment that you have the opportunity to make but it's not everyone who can afford to do it. If you are the sort of person lucky enough to be able to do it, you owe it to yourself to get as much overall benefit as you can without causing too much short term pain.

Two, you asked for philosophies not figures so apologies if there's too many numbers. But it's finance - you can't avoid getting into numbers.

The philosophy is, if you can afford it, create an extra income for yourself by doubling your pension. It's a good target, and the best return you can get on any safe investment, and a huge insurance blanket for accidentally being long-lived! The existence of the insurance blanket / back stop / safety net, means you can pull forward other funding that you might have otherwise needed to retain for a later life "what if I live a long time" scenario, because whatever other investment you were saving for later life, it won't be as lucrative as this one if it's low risk and inheritable.

MyOnlyPost

bowlhead99 wrote: »

If you die before 85 don't worry, nothing is lost, either your spouse or estate gets the money you missed, or your spouse chooses to have a nice boost to their own pension if they think that would be better for them.

I have 25 years to go until SP age so I haven't given a lot of thought to it yet but this part of your post intrigued me. I had always assumed that when you died state entitlement died with you, so if you defer then the amount you would have collected is passed on in your estate?

Triumph13

uk1 wrote: »

You can't ignore the raw numbers about longevity etc, but the numbers seem to me to be simply one component in a much larger philosphical picture. But I can't focus clearly on what those larger philosophical considerations should be.

Any ponderings or thoughts greatly appreciated.

Thanks.

Other than any personal health issues impacting your likely longevity, the key factors are probably how much leeway do you already have in your budget and how much of your income is already guaranteed and indexed?
If things are tight, then burning through a lump of your investments early in return for the peace of mind of a guaranteed income is probably a good trade, especially if you don't have any other DB schemes and are relying on drawdown (and therefore potentially exposed to any prolonged market crash). At the other extreme, if you already have enough DB pension or indexed annuity income to comfortably cover your living costs, then the added flexibility of capital to spend however you want is probably worth more than extra income you probably wouldn't spend anyway. If you are even more fortunately placed such that your income allows you to defer the state pension without depleting capital or feeling you are depriving yourselves then the answer doesn't actually matter and so it's not worth worrying about.
Most people are going to be at some kind of in between point on that continuum and are going to have to decide what will make them happiest. That shouldn't be a decision based on 'how much total money will I get if I live to x age' though. It should be much more about what will help you sleep at night and what will fit best with the kind of lifestyle you want to have. If we knew every detail of your finances we could possibly make more informed suggestions, but in the end it would still come down to what feels right for you, maximises your happiness and minimises your worries.

Triumph13

MyOnlyPost wrote: »

I have 25 years to go until SP age so I haven't given a lot of thought to it yet but this part of your post intrigued me. I had always assumed that when you died state entitlement died with you, so if you defer then the amount you would have collected is passed on in your estate?

Unless the rules change again, by the time you retire you'll be right! If you hit SPA before April 2016 then the extra pension from deferring could be inherited by a spouse. For anyone hitting SPA after that it can't (and the rate of increase nearly halved

uk1

Just to thank all that responded ...

A particularly big thank you bowlhead99 for taking so much trouble and time and I think really closely homed in more to talking about the common sense behind such decisions.

I think one shouldn't so easily overlook the compound inflation effect of deferring if the alternative is to leave the cash in say Santander that is funding the deferral. In the unlikely but possible event that the 2.5% remains because the politicos know that removing it might tip a party into government then 2.5% compounded over 10 years is not "insignificant".

I guess from a philosphical viewpoint. We sort of retired at 50'ish - have done all the things we have wanted to - and as we have enough now and have an additional buffer of a second home that we are basically not using if needed for more emergency cash .... and ... our biggest fear is of the unknown effects of perhaps living longer than "expected" .... and the fears are that we might be short of cash much later in life. That favours your defer for ten years plan because it essentially becomes our only way of ensuring almost guaranteed having greater inccome later. As I am completely risk averse because I see no reason to take a risk if I need not do so out of actual neccesity ("why risk it all if you need take no risk") - then this also favours deferring for as long as we can if I have no concern if it were "good value" because err ... we would be dead and not really bothered.

I'm also wary of life expectancy calculations. I have an interest in how rearch misleads as often as it sheds light. For example does someone medicated for cholesterol, anxiety, hypertension have a lower life expactancy than a normal person suffering from all those conditions without knowing knowing about most and treating none?

Also thanks Triumph13 for another set of thought provokers.

I think I'm leaning towartds longer deferrals for both of us .....

Thanks again all. Extremely appreciative of the efforts.

bowlhead99

MyOnlyPost wrote: »

I have 25 years to go until SP age so I haven't given a lot of thought to it yet but this part of your post intrigued me. I had always assumed that when you died state entitlement died with you, so if you defer then the amount you would have collected is passed on in your estate?

If you take a few years off and then die before you start taking the increased pension (or cash lump sum) then your heirs just go to DWP and say hey, my spouse/ parent had never got around to asking for his state pension from year x to y. So you owe us five years pension, hand it over with interest. And the government says no problem, here you go. That should be same under new system (hitting state pension age after Apr 2016) as with the old (pre Apr 2016) system that OP is using.

However, once you're getting the pension again (and have elected to take either the enhancement, or a lump sump of backpay) then there is nothing for your heirs to collect under the new system that you and I will be on in 25 years or so if it still exists by then. At the time you go back onto the state pension that you've been deferring, you decide based on your own personal circumstances and health etc whether you really want the enhanced pension forever, or just the lump sum with a relatively small amount of interest. And that's it. If you die and had gone for the annuity, it dies with you. Whereas the lucrative scheme that the OP is on, it's inheritable by spouse. [note: we're only talking about inheriting the extra 10% a year entitlement earned by deferring - the underlying main weekly entitlement is not inheritable]

There is some small print of course but basically the new deal is not as good as the old one. Lower rate of accrual (not as good as the 10.4% a year) and less 'inheritableness' for the enhanced pension top up.