Defer state pension-Are my sums correct?

blindman

Hi

 Apologies if this is posted elsewhere, but I had a good look around and could not find the answer to these circumstances.

 I will reach State Pension entitlement in Nov this year ( I will be 66) and know that the payment at present equates to nearly £10,000 per annum in my case.

 I already receive an income of £12,000 and can manage to live on that, so I pay no tax at the moment on my income.

 (Any major expenditure such as holidays comes from our savings which are at the moment only earning 2%.)

 In order to not pay tax on my upcoming pension income I know that I can defer the payments, which will result in larger payment once I take the pension.

 

This deferral equates to a 5.8%increase per annum.

 

Now according to calculations the break even point for getting back the amount deferred is 17 years, which for me is too long to wait. (

I'm a fit 66 year old and would hope to live for another 20 years)

 

However does that take into consideration the fact that I would not be paying tax (at 20%) on the £10,000?

 Because if I take the tax into account my calculations work out the break even point is 10 years, which is a more acceptable time to wait for the break even point.

 

Is this correct ?

 

Does the effort to not pay tax on my State pension outweigh the fact that it will take 10 years to break even?

 

Cheers.

 

 

 

 

 

 

 

 

Dazed_and_C0nfused

Ignoring the first year which is often a bit messier with things changing what income will you once you start taking your State Pension?

Just the increased State Pension or will you still have the existing £12k (pension or salary?)?

Will you have other new pension sources coming into payment?

xylophone

I take it that you are married? 
See https://www.thisismoney.co.uk/money/pensions/article-4565554/If-delay-state-pension-die-heirs-lose-out.html regarding what would happen if you died in deferment.

I’m afraid that the information you have been given is correct. For those who reached state pension age after 6 April 2016, where someone defers taking their state pension and then dies before making a claim, the most that falls due to their estate is three months of ‘backdated’ state pension.

Even if they did have a spouse, there is no general entitlement to ‘inherit’ the pension payments that were never paid.

Does your £12000 income arise from pension/interest on savings/dividends?

Even if all pension income, I honestly can't see the point of deferring under the new system.

You would not pay any tax on the first £500, and even after tax on the balance  you'd be better off by well over £7000 a year.

You could use that, rather than savings to pay for your holidays.

If it genuinely is surplus to requirements, you could  consider opening a SIPP eg with Hargreaves Lansdown, contribute £2880 per annum and receive tax  relief of £720 which would be paid into the SIPP - you could nominate your wife/another person as beneficiary if it was still undrawn at death.

blindman

Dazed_and_C0nfused said:

Ignoring the first year which is often a bit messier with things changing what income will you once you start taking your State Pension?

Just the increased State Pension or will you still have the existing £12k (pension or salary?)?

Will you have other new pension sources coming into payment?

Thanks for the quick reply.
1. 12K income now is a pension so I will have both when I take the increased SP.
2. I have deferred a works pension (£9K) since last year, so would be taking that at some time.

3 Mrs B will get a works pension in 2021 and then the SP in 2022.
She pays no tax at the moment and these two additions would probably be tax free in total.

blindman

xylophone said:

I take it that you are married? 

Does your £12000 income arise from pension/interest on savings/dividends?

Even if all pension income, I honestly can't see the point of deferring under the new system.

You would not pay any tax on the first £500, and even after tax on the balance  you'd be better off by well over £7000 a year.

You could use that, rather than savings to pay for your holidays.

If it genuinely is surplus to requirements, you could  consider opening a SIPP eg with Hargreaves Lansdown, contribute £2880 per annum and receive tax  relief of £720 which would be paid into the SIPP - you could nominate your wife/another person as beneficiary if it was still undrawn at death.

Married - Yes
12K from pension
See answer to Dazed and Confused re other incomes coming in a few years.

xylophone

If you have surplus income, certainly worth considering the SIPP option for both.

Dazed_and_C0nfused

Don't understand where you are getting the 10 years from to be honest.

You could do all sorts of complicated sums guessing at inflation etc but just using your figures for one year then you would be giving up £8,100 in State Pension (net of the tax you would have to start paying on the existing £12k pension).

In return you would gain £580 extra pension per year.  But that is clearly going to all be taxable so it's actually just worth £464 to you.

£464 for 17.5 years sees you accurate £8,120 extra State Pension to replace the £8,100 you have given up by deferring for a year.  Each year after that is £464/year profit. 

So long life is the key to making this profitable.

And in reality that £580/464 is going to increase by inflation related increase each year but don't see that turning it into a 10 year break even point.

p00hsticks

blindman said:

 In order to not pay tax on my upcoming pension income I know that I can defer the payments, which will result in larger payment once I take the pension.

I'm not really sure what you are trying to achieve. Your private pension is currently using most of your personal allowance, and will probably effectively continue to do so.  So essentially, whenever you choose to take it, nearly all of your state pension is going to be taxed at the rate in force at the time - so you either pay less tax on a smaller pension now, or more tax on a larger pension in x years time.

Given the current expenditure that the government is making, I can only see the basic rate of tax going one way in future years, so if I was in your shoes I'd be opting to take it now and pay 20% tax rather than take it later at whatever the rate happens to be at the time.

blindman

Dazed_and_C0nfused said:

Don't understand where you are getting the 10 years from to be honest.

You could do all sorts of complicated sums guessing at inflation etc but just using your figures for one year then you would be giving up £8,100 in State Pension (net of the tax you would have to start paying on the existing £12k pension).

In return you would gain £580 extra pension per year.  But that is clearly going to all be taxable so it's actually just worth £464 to you.

£464 for 17.5 years sees you accurate £8,120 extra State Pension to replace the £8,100 you have given up by deferring for a year.  Each year after that is £464/year profit. 

So long life is the key to making this profitable.

And in reality that £580/464 is going to increase by inflation related increase each year but don't see that turning it into a 10 year break even point.

You have cleared up the misunderstanding I had.
I see now that for ever year I defer it takes 17 years to get that years missed payments back.
For some reason I thought that if I deferred for 17 years anything after then would be profit?
Even so it's certainly not worth it.

blindman

p00hsticks said:

blindman said:

 In order to not pay tax on my upcoming pension income I know that I can defer the payments, which will result in larger payment once I take the pension.

I'm not really sure what you are trying to achieve. Your private pension is currently using most of your personal allowance, and will probably effectively continue to do so.  So essentially, whenever you choose to take it, nearly all of your state pension is going to be taxed at the rate in force at the time - so you either pay less tax on a smaller pension now, or more tax on a larger pension in x years time.

Given the current expenditure that the government is making, I can only see the basic rate of tax going one way in future years, so if I was in your shoes I'd be opting to take it now and pay 20% tax rather than take it later at whatever the rate happens to be at the time.

I have to agree with you here, I just needed confirmation I wasn't missing a trick with deferring the pension.
Thanks.
I need to look at what to do with the extra income that will become taxable if I take both my work and state pension.

Flim

...Life is potentially too short, if you are already financially secure anyway I would just take the money now and spend it. What’s the point of deferring and having more money when you are going to be too old to enjoy it...