MSE News: Over 64? This is your LAST CHANCE to boost your state pension 28 March 2017 at 12:26PM in Pensions, annuities & retirement planning 7 replies 3.1K views

MSE_Luke

If you're a woman aged 64 or a man aged 66 or older, urgently check if it's worth topping up your state pension...

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'Over 64? This is your LAST CHANCE to boost your state pension'

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greenglide

I had a quick scan and could see no mention of deferment which pays trice the rate of Class 3a contributions.

The rate for Class 3a is reasonable but not brilliant, especially when compared to deferment.

Does anyone else get the advertisements from HMG for this deal on face-ache? The comments from the face-ache dwellers are quite amusing and show no understanding of the real world - lots of comments about things being "stolen" and taking many years to get your money back. All seem convinced that they would live more than a year or two.

Depressing!

JezR

The take up of Class 3a has been well below the expected quarter of a million. It has picked up somewhat recently with the advertisements; before then it was languishing in the low thousands.

I think it doesn't seem that much money when quoted in pounds per week, even if it is actuarially neutral.

Pincher

"at 65 it's £890 per £1 a week,
at 85 it's £394 per £1."

£394 / 52 = 7.6 years

So you need to live to 93 years old to break even.

The way it's going, the NHS could end up with a policy of no wasting money on over 90s, so they can use their resources on people with a few more years left.

My agony, as I die from denial of food and water, because nobody wants to take responsibility for killing me, is "I haven't got my money BACK!"

jamesd

Lots of balderdash there. The class 3A state pension top up is usually government mis-selling that can be beaten until age 81 by deferring the state pension and getting a 10.4% increase per year of deferral instead. But there is some time value of money effect that does eventually make class 3A better than deferring from state pension age all the way to age 81. The option to defer doesn't end on 5 April, just the usually bad value for money Class 3A top-up one.

From my general tips on drawdown thread:

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Class 3A state pension top-up

Available for those who reached state pension age before 6 April 2016 it pays less than state pension deferral until age 81 so only do it if you're planning to defer until at least 81 and still want more guaranteed for life income, else defer instead. It still beats an inflation-linked annuity at any age if in normal good health so do it instead of buying one of those, it's just that deferral beats it. Here's a table showing the percentage of capital that class 3A pays at each age to make it easier to compare with deferral or an annuity. Guidance for advisers. Class 3A doesn't count towards the maximum state pension limit, for either the buyer or a person who inherits it.

One important issue to consider is how long it would take to defer because the state pension top up is immediate, while deferral isn't. This means that when comparing you have to pay yourself a higher income - the one increased by the top up - for as long as you're deferring. That effectively roughly decreases the amount you have to spend by top-up increase times number of years deferring. So say a 65 year old had £21k to spend they would get a top up of £1,226.40 a year. If it would take three years to spend the money on deferring they would have to reduce the effective amount being spent by three times that, £3,679.20. This means that the deferral increase would get them only £1,801 a year instead of the £2,184 a year it would pay if this wasn't allowed for. Both still beating the top up option, though.

State pension inheritance rules.
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For convenience here's the table I linked to:

Age Increase Calculation, also multiply by 100 to get %
63 5.56% (52 / 934)
64 5.70% (52 / 913)
65 5.84% (52 / 890)
66 5.97% (52 / 871)
67 6.14% (52 / 847)
68 6.29% (52 / 827)
69 6.49% (52 / 801)
70 6.68% (52 / 779)
75 7.72% (52 / 674)
80 9.56% (52 / 544)
81 10.12% (52 / 514)
82 10.74% (52 / 484)
85 13.20% (52 / 394)

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Wherever only a short time is being considered, deferral beats class 3A as long as class 3A is paying less than the 10.4% for deferral.

State pension deferral can be started once even by a person who has already claimed their state pension. It's a good deal usually. Here's my quick write-up on that:

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State pension deferral

Defer your state pension if you have normal life expectancy and no special case for not doing it. Up to five years has a good chance of breaking even, up to ten years can be good for longevity insurance (more here) and to increase the safe withdrawal amount from drawdown, by providing more of your minimum income requirement.

A person who reached state pension age after 6 April 2016 gets an increase of 5.8% per year of deferral, pro-rated for parts of years, not inheritable, no lump sum option. Before then the increase is 10.4%, mostly inheritable by a spouse and with the option of taking a lump sum that is taxed at your current highest income tax rate, which could be zero if within your personal allowance. For deferral before 6 April 2005 the increase was 7.5% with no lump sum increase and a cap of five years.

There's a cap on the maximum state pension. For those who reached state pension age before 6 April 2016 the limit on additional state pension from all sources including deferring was £164.36 a week. With the 2016-17 basic state pension of £119.30 on top that'd be £183.66 a week limit. However, this might not apply to deferring. Please do verify the situation before you get over that amount.

For how long to defer see Does it pay to delay your state pension? and use the calculator at https://www.johnkay.com/pension/ that is unusual because it takes the alternative investments into account. Use the end of your planning horizon or longer as your remaining life expectancy when using the calculator for drawdown planning.

I get these break even numbers of years to defer using normal life expectancy:

If invested to get 3% plus inflation (shares, corporate bonds)
Male aged 72, 15 years to go, defer 1 year 5 months
Female aged 67, 22 years to go, defer 4 years 2 months

If using savings accounts to get 0% plus inflation
Male aged 72, 15 years to go, defer 2 years 8 months
Female aged 67, 22 years to go, defer 6 years 2 months

I get these break even numbers of years to defer using the life expectancy that one person in four will reach:

If invested to get 3% plus inflation (shares, corporate bonds)
Male aged 72, 21 years to go, defer 3 years 9 months
Female aged 67, 29 years to go, defer 6 years 7 months

If using savings accounts to get 0% plus inflation
Male aged 72, 21 years to go, defer 5 years 8 months
Female aged 67, 29 years to go, defer 9 years 8 months

For more background see:
Deferring a state pension - is it worthwhile? (Caution, this does not use cohort life expectancies and doesn't compare to other uses of the money. Use the two or five year above average results to try to compensate).

What is state pension deferral? Handy for its mention of benefits and living in a country where the state pension doesn't get inflation increases (defer longer).

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State pension deferral and occasionally Class 3A really come into their own as longevity insurance, providing a nice guaranteed income if you live longer than average. For those in normal health until sometime after age 75 they both also tend to beat buying an annuity. For those reasons I'm a fan of state pension deferral.

It also appears that the article made the common mistake of giving life expectancies that are too low, probably period life expectancies instead of the cohort life expectancies that should be used, the ONS how long will I live tool gets it right, of course.

But why did I call it balderdash when it says there are other things to check? Because the focus is to say that it's a good idea with things like "Certainly for married people on the state pension with little other income who don't pay tax – this looks a good bet" when it's really usually a bad idea that people should be warned against buying until after they check their usually better options.

jamesd

An example of why the top-up instead of deferring is usually an expensive mistake from the earlier discussion of deferring vs Class 3A, like this real life example:

"My wife gets £137/wk that's, £7124/yr

If she deferred for a year she would get 10.4% increase or £14/wk at a cost of £7124, a years worth of state pension.

Now using the calculator at .gov.uk and after entering her dob and using £14 as the amount of class 3A she needs to buy it costs £11,578. So this option is £4,454 more expensive!"

Don't just go for the top up. Paying £4,454 more for the same income would be a very expensive mistake!

kidmugsy

People who can afford to should probably consider doing them both, with the usual caveats about good health. There is a lack of promising alternative investments: anything with comparably low risk promises only feeble returns. In the case of index-linked gilts they promise real losses i.e. if you hold them to maturity your return will be well below the rate of RPI inflation - far enough below that you can be confident that it'll be below CPI inflation too. This evening's figure for the 2047 ILG, for example, shows a real return of (-1.639% p.a.). Historically CPI averages about 0.8% p.a. below RPI, so let's call it (-0.839% p.a.) below CPI. So if you can reinvest the coupons at the same interest rate as the ILG itself offers for 30 years you'll end up poorer by 22% compared to inflation. If you spend the coupons - and getting spending money is probably the point of the exercise - you'll end up somewhat poorer yet. And the coupons will be miserably small anyway.

jamesd

Yes, doing both can be a great move for someone who wants lots of guaranteed income at a far better price than an annuity would cost a person in normal good health for the same income.

Can be a really good move for a person without a final salary pension or after transferring one - these days many transfer values are so high that you might be able to double your income by transferring and deferring instead of just taking the work pension.