Defer state pension-Are my sums correct?

pafpcg

blindman said:

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.

I think there's a simpler way of looking at the decision:  If I defer my pension for a few years, when I start to take the pension with the deferment increase, will I survive for another 17 years?
I'll break-even if I'm still receiving the increased pension 17 years later - survive longer and I've made a "profit"; if I die before, I've made a "loss".  So, if you expect to survive for twenty years (2040), if you defer now and claim in three years time, you'll break-even in 2040. 

The New State Pension from April 2016 is nowhere near as generous as the pre-2016 State Pension which had a deferment rate of 10.4%pa - you only had to survive for ten years after claiming a deferred pension.  For those who could afford to live without claiming their pre-2016 State Pension for a few years, it made financial sense to defer - various studies looking at life expectancy suggested that males at 65 should defer for 4 - 7 years, whilst females could extend deferment to 9 years.  The post-2016 calculation is much bleaker - for many, it just doesn't make financial sense.  Which is, of course, exactly what the statisticians setting the deferment rate were asked by the Government to deliver.

However, it's not quite as simple as comparing the years of pension not claimed against the extra pension that would be paid out.  If you were to collect the State Pension and to invest it, assuming that the investment return is better than CPI, that investment return, over the years during which the pension is paid rather than deferred, would effectively reduce the perceived benefit of deferment.  (There are several threads on this forum which consider the pros & cons of deferment in much greater detail.)

blindman

pafpcg said:

So, if you expect to survive for twenty years (2040), if you defer now and claim in three years time, you'll break-even in 2040.  

I get that now, misunderstood it before this post.
 (There are several threads on this forum which consider the pros & cons of deferment in much greater detail.)

Any chance of a link to one of those posts please?

Thanks

jsinc

blindman said:

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.

Yes that's basically correct. e.g. putting it another way from when I did the sums for mum - for an average english woman age 65.5 of average life expectancy the optimum deferral period is 2 years (for enhanced life expectancy 2 years above average = 3 years, 4 years above average = 4 years). But in all three cases the difference is small - effectively getting an extra 2, 5 and 9 months of payments respectively over average period of receipt vs. not deferring.

That's using the methodology here, adjusted for England not UK and with updated National Life Tables data:

https://rss.onlinelibrary.wiley.com/doi/full/10.1111/j.1740-9713.2015.00814.x

I don't know about the updated output for men but would guess, per the article, there's still no incentive to defer under the 5.8% rule all-else-equal. i.e. the piece doesn't factor in any differential income tax or rate of return on other investments. There's a rough calculator that takes the latter into account here: https://www.johnkay.com/pension/

pafpcg

blindman said:

pafpcg said:

So, if you expect to survive for twenty years (2040), if you defer now and claim in three years time, you'll break-even in 2040.  

I get that now, misunderstood it before this post.
 (There are several threads on this forum which consider the pros & cons of deferment in much greater detail.)

Any chance of a link to one of those posts please?

The best discussion I'm aware of is probably in this thread:
https://forums.moneysavingexpert.com/discussion/5515463/state-pension-deferring-and-top-ups

That thread contains the links to external sources which Jsinc has quoted in the post above. See Jamesd's post (#8) and subsequent discussion on the complexity of the calculation.  However, the discussion does relate mainly to pre-2016 deferment when the high rate of increase made deferment a worthwhile option;  post-2016, it's nowhere near as attractive.  But follow the links to the raw data and make your own decision.

You could also look at:
https://forums.moneysavingexpert.com/discussion/5592110/state-pension-deferment-philosophy/p1

And for reasons why NOT to defer, purely for reassurance, take a look at these two old long threads about the difficulties faced when finally deciding to stop deferring and claim the pension:
https://forums.moneysavingexpert.com/discussion/5479517/how-long-before-i-receive-deferred-sp/p1
https://forums.moneysavingexpert.com/discussion/5805110/claimng-deferred-state-pension-online/p1

blindman

Thanks to all for the advice and effort

bluenose1

Has you considered Mrs B giving  you the married tax allowance so you could receive an additional £1,250 tax allowance.  If her income is less that £12,500 it is worth considering. 

What is the marriage tax allowance? The marriage tax allowance allows you to transfer £1,250 of your personal allowance (the amount you can earn tax-free each tax year) to your spouse or civil partner if they earn more than you. If your claim is successful, it will lower the higher earner's tax bill for the tax year,

bowlhead99

blindman said:
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.

If you only live an 'average' amount of time it probably won't appear worth it. The previous (pre 2016) scheme was much more lucrative, in terms of rate and it being inheritable by a spouse. But I guess it was too lucrative, which is why they reduced it to the current more sensible terms.

What it might be good for is insurance against living a long life. Increased pension forever is a good thing if you're in the half of people who live longer than average rather than shorter than average. One of my grandparents is 100+ not out.

If you take the pension and at the end of the year, realise you don't need it and the cash is going spare but you don't wish to risk it on the stock market, you could buy an annuity, but you'd find they pay quite a bit less than the rate the government is offering. As bond yields and market annuity rates are on the floor. So if you don't need the cash the pension would have paid over the next couple of years,  deferring is not an entirely terrible plan if you don't want stock market risk of sticking in in an ISA or pension investment. 

blindman

bluenose1 said:

Has you considered Mrs B giving  you the married tax allowance so you could receive an additional £1,250 tax allowance.  If her income is less that £12,500 it is worth considering. 

What is the marriage tax allowance? The marriage tax allowance allows you to transfer £1,250 of your personal allowance (the amount you can earn tax-free each tax year) to your spouse or civil partner if they earn more than you. If your claim is successful, it will lower the higher earner's tax bill for the tax year,

Already done that thanks

GunJack

I don't see the point in not taking any pension just to avoid paying tax on it, be it your state or the deferred company one you have not taken yet....look at it another way - if you're paying some tax, you've got a higher income to do as you will with

Silvertabby

GunJack said:

I don't see the point in not taking any pension just to avoid paying tax on it, be it your state or the deferred company one you have not taken yet....look at it another way - if you're paying some tax, you've got a higher income to do as you will with

We had a chew on this when Mr S hit SPA a couple of years ago.  On the basis that he would pay 20% tax regardless of when he took it, we decided that a bird in the hand and all that.