Retirement Planner - Importance of Inflation?

pensionpawn

Stubod said:

What are you living off then? How can you be certain of a higher index linked pension? You may die before you start to take it. (Nothing is certain except death and income tax!) What then for your spouse? Your private pension is now lower than it would have been had you taken your SP as soon as you could. If you have no spouse, or any family to pass your estate to, then no problem.

????...I am living off my deferred DB pension and my S&S ISAS, my spouse already has an index linked pension and will get also get the full (index linked) SP and I am certain that if I defer my SP It will be increased by approx 5% for every year I defer it and my private pension is what it is, why would it be "lowered" ???

I was referring to DC pensions and SP deferral. Obviously you have no pot to deplete with a DB pension however in your position I would immediately take the SP and allow the S&S ISAS to continue to grow untouched. Hopefully you will live a long and healthy life however if you're beamed up a month before starting your, let's say 5 years deferred SP, that's 5 years of unnecessarily dipping into your ISAS. More to pass on to your spouse. That's the way I see it.

Linton

pensionpawn said:

Stubod said:

What are you living off then? How can you be certain of a higher index linked pension? You may die before you start to take it. (Nothing is certain except death and income tax!) What then for your spouse? Your private pension is now lower than it would have been had you taken your SP as soon as you could. If you have no spouse, or any family to pass your estate to, then no problem.

????...I am living off my deferred DB pension and my S&S ISAS, my spouse already has an index linked pension and will get also get the full (index linked) SP and I am certain that if I defer my SP It will be increased by approx 5% for every year I defer it and my private pension is what it is, why would it be "lowered" ???

I was referring to DC pensions and SP deferral. Obviously you have no pot to deplete with a DB pension however in your position I would immediately take the SP and allow the S&S ISAS to continue to grow untouched. Hopefully you will live a long and healthy life however if you're beamed up a month before starting your, let's say 5 years deferred SP, that's 5 years of unnecessarily dipping into your ISAS. More to pass on to your spouse. That's the way I see it.

But if you die a month after restarting a deferred SP surely your spouse would have all the pension pot that would otherwise have been used to meet your plans if you had not died early. If that is not sufficient perhaps your plan is too risky anyway especially as you are just as likely to die in extreme old age.

NottinghamKnight

pensionpawn said:

NottinghamKnight said:

pensionpawn said:

NottinghamKnight said:

pensionpawn said:

Stubod said:

Assuming you are not too fussed about leaving loads to next of kin / charity, it makes sense to me to burn through your "pot" and defer the state pension, particularly if you are a little risk averse. I think it offers around 5% increase for each year deferred?

Why defer your state pension? Yes your SP will increase by around 10% each year however you will then be depleting your private pension instead. This isn't for me as my investments should (are) growing near that rate and secondly, if you croak it before you start taking your pension you've lost a chunk of money that you could have passed to your estate.
I'd be more interested in the opposite, taking your pension earlier at a reduced rate. Also, as with annuities, taking your pension at a reduced rate from your SP age which allows for a significant percentage to be passed onto your wife / husband. 

Its very 'optimistic' to assume you can consistently get 10% returns from your pension investments, how long have you been investing for?

NottinghamKnight said:

pensionpawn said:

Stubod said:

Assuming you are not too fussed about leaving loads to next of kin / charity, it makes sense to me to burn through your "pot" and defer the state pension, particularly if you are a little risk averse. I think it offers around 5% increase for each year deferred?

Why defer your state pension? Yes your SP will increase by around 10% each year however you will then be depleting your private pension instead. This isn't for me as my investments should (are) growing near that rate and secondly, if you croak it before you start taking your pension you've lost a chunk of money that you could have passed to your estate.
I'd be more interested in the opposite, taking your pension earlier at a reduced rate. Also, as with annuities, taking your pension at a reduced rate from your SP age which allows for a significant percentage to be passed onto your wife / husband. 

Its very 'optimistic' to assume you can consistently get 10% returns from your pension investments, how long have you been investing for?

31.5 years.

Over 10% annual return since 1988? You must be worth several million  by now then.

Alas, unfortunately not. I started my first pension in April 1989 and stopped paying into it in April 1996. By then it was worth £12k4 from £2k7 worth of contributions. Now it's worth £112k. That's one of my 'less adventurous' funds and it's managed around 10% pa. If I last as long as my father, my funds have exactly the same amount of time to continue growing. Across a diverse portfolio, 10% pa is quite attainable.

It may be possible but certainly not what most people would plan around. The historic performance of probably more balanced portfolios might give 4% plus inflation, commonly approximated to 7%, but many claim that is too optimistic. You may have an aggressive strategy and it may pay out double figure returns but it should also be considered what the average investor might do. 

ukdw

Linton said:

Sea_Shell said:

If you defer SP for 1 year, how long do you have to live to "break even"?

Ignoring the effect of inflation (or beyond) increases, which could change the numbers significantly, defering SP breaks even after 17.2 years which is pretty close to the average lifespan.  Defering SP is insurance and like all insurance you only benefit if you need to use it.

But the cost/benefit analysis is more complex that that.  If you die unexpectedly early you would not have benefited by not defering because your financial plan will be based on a long life, so you will just leave more money in yourpension  pot.  You could not have used it because you did not know you were going to die early.

I am currently considering whether to defer the SP myself, my thoughts are:

1. I think you need to add an additional year to the 17.2 figure  to take into account the fact that you won't be able to withdraw the 5.8% extra amount in the first year while the SP is deferred - pushing the simple payback period up to 18.2 years - or age 85 for a 67 year old - which matches the current projected average lifespan for a 67 year old male, and is 2 years ahead of the average 87 for a female.

2. I presume the 17.2 years payback figure applies to 0% tax payers.  20% tax payers would I presume need more like a 23 years - which is beyond average lifespan, and 40% tax payers even more beyond.   EDIT - not sure this point is correct now that I re-read my post

3.  The 17.2 years also I presume is based on the extra £9k cash you have to spend to make for losing state pension only  losing growth at a rate matching pension inflation. - If instead this £9k saved if  is invested in something that gives a greater than inflation return then this would add quite a few extra years to the break even point.  Conversly if the £9k would have been kept as cash it might pull the break even date earler.

4. Finally, I believe all of the payback figures go up by a further year for each additonal year you defer - so deferring 2 years would push the simple payback period to 24 years for a 20% tax payer.

If the above points are correct then I think I will take SP as soon as I can get it.

Linton

ukdw said:

Linton said:

Sea_Shell said:

If you defer SP for 1 year, how long do you have to live to "break even"?

Ignoring the effect of inflation (or beyond) increases, which could change the numbers significantly, defering SP breaks even after 17.2 years which is pretty close to the average lifespan.  Defering SP is insurance and like all insurance you only benefit if you need to use it.

But the cost/benefit analysis is more complex that that.  If you die unexpectedly early you would not have benefited by not defering because your financial plan will be based on a long life, so you will just leave more money in yourpension  pot.  You could not have used it because you did not know you were going to die early.

I am currently considering whether to defer the SP myself, my thoughts are:

1. I think you need to add an additional year to the 17.2 figure  to take into account the fact that you won't be able to withdraw the 5.8% extra amount in the first year while the SP is deferred - pushing the simple payback period up to 18.2 years - or age 85 for a 67 year old - which matches the current projected average lifespan for a 67 year old male, and is 2 years ahead of the average 87 for a female.

2. I presume the 17.2 years payback figure applies to 0% tax payers.  20% tax payers would I presume need more like a 23 years - which is beyond average lifespan, and 40% tax payers even more beyond.   EDIT - not sure this point is correct now that I re-read my post

3.  The 17.2 years also I presume is based on the extra £9k cash you have to spend to make for losing state pension only  losing growth at a rate matching pension inflation. - If instead this £9k saved if  is invested in something that gives a greater than inflation return then this would add quite a few extra years to the break even point.  Conversly if the £9k would have been kept as cash it might pull the break even date earler.

4. Finally, I believe all of the payback figures go up by a further year for each additonal year you defer - so deferring 2 years would push the simple payback period to 24 years for a 20% tax payer.

If the above points are correct then I think I will take SP as soon as I can get it.

Point 2 is incorrect assuming that your tax position remains the same. If you are using drawdown then every £ you spend comes from taxed income no matter whether this is SP or a pension pot. Deferring is not costing you £9k per year because that is the gross amount. As a 20% tax payer you would only need to replace £7200 SP.

The object of the exercise is not to make extra return but rather reduce risk in later life. I take the view that money left at death, beyond that needed to support a spouse, is wasted money.  So one aim of retirement financial management is to minimise this without taking the risk of living too long for your finances.

I believe that considered use of SP deferral could enable one to safely drawdown and spend more of one’s own money in the early years since there is less need to retain it for what in most cases has to be a an over estimate of ones lifespan.

This approach could be supplemented by ending deferral and buying an annuity when you reach the age at which annuity rates exceed 5.8%. This would enable you to avoid having to make any estimate of your lifespan and provision for extreme old age since all the risk would lie with the state and the annuity company.

Notepad_Phil

On the topic of possibly deferring the state pension, the approach we're likely to take is to defer Mrs Notepad's state pension but not mine. Although we are both in good health, Mrs Notepad by the law of averages is likely to be in receipt of her pension far longer than I will so we'll be even more likely to 'win' the payback battle and between the two of us I'm more likely to be interested in the necessary financial planning to keep our non-guaranteed portfolio components hopefully beating whatever inflation arises in our later life, so Mrs Notepad is the one that I'd like to have as big an index-linked component as possible (just in case I'm not around).

GSP

ukdw said:

Linton said:

Sea_Shell said:

If you defer SP for 1 year, how long do you have to live to "break even"?

Ignoring the effect of inflation (or beyond) increases, which could change the numbers significantly, defering SP breaks even after 17.2 years which is pretty close to the average lifespan.  Defering SP is insurance and like all insurance you only benefit if you need to use it.

But the cost/benefit analysis is more complex that that.  If you die unexpectedly early you would not have benefited by not defering because your financial plan will be based on a long life, so you will just leave more money in yourpension  pot.  You could not have used it because you did not know you were going to die early.

I am currently considering whether to defer the SP myself, my thoughts are:

1. I think you need to add an additional year to the 17.2 figure  to take into account the fact that you won't be able to withdraw the 5.8% extra amount in the first year while the SP is deferred - pushing the simple payback period up to 18.2 years - or age 85 for a 67 year old - which matches the current projected average lifespan for a 67 year old male, and is 2 years ahead of the average 87 for a female.

2. I presume the 17.2 years payback figure applies to 0% tax payers.  20% tax payers would I presume need more like a 23 years - which is beyond average lifespan, and 40% tax payers even more beyond.   EDIT - not sure this point is correct now that I re-read my post

3.  The 17.2 years also I presume is based on the extra £9k cash you have to spend to make for losing state pension only  losing growth at a rate matching pension inflation. - If instead this £9k saved if  is invested in something that gives a greater than inflation return then this would add quite a few extra years to the break even point.  Conversly if the £9k would have been kept as cash it might pull the break even date earler.

4. Finally, I believe all of the payback figures go up by a further year for each additonal year you defer - so deferring 2 years would push the simple payback period to 24 years for a 20% tax payer.

If the above points are correct then I think I will take SP as soon as I can get it.

Yes I think the timing of deferring on SP is a late one in life.

pensionpawn

Linton said:

pensionpawn said:

Stubod said:

What are you living off then? How can you be certain of a higher index linked pension? You may die before you start to take it. (Nothing is certain except death and income tax!) What then for your spouse? Your private pension is now lower than it would have been had you taken your SP as soon as you could. If you have no spouse, or any family to pass your estate to, then no problem.

????...I am living off my deferred DB pension and my S&S ISAS, my spouse already has an index linked pension and will get also get the full (index linked) SP and I am certain that if I defer my SP It will be increased by approx 5% for every year I defer it and my private pension is what it is, why would it be "lowered" ???

I was referring to DC pensions and SP deferral. Obviously you have no pot to deplete with a DB pension however in your position I would immediately take the SP and allow the S&S ISAS to continue to grow untouched. Hopefully you will live a long and healthy life however if you're beamed up a month before starting your, let's say 5 years deferred SP, that's 5 years of unnecessarily dipping into your ISAS. More to pass on to your spouse. That's the way I see it.

But if you die a month after restarting a deferred SP surely your spouse would have all the pension pot that would otherwise have been used to meet your plans if you had not died early. If that is not sufficient perhaps your plan is too risky anyway especially as you are just as likely to die in extreme old age.

"All the pension pot"? Wrt Stubod's situation I accepted that as he has a DB pension, there is not pot to 'run down' when deferring your SP (though he said he is accessing / reducing his ISA).

If you consider someone with just a DC pension at SPA on retirement they either take their SP and top up from their private pension or they live entirely off their private pension whilst deferring their SP. So lets say that Dave has a £300k pot, a full SP at 67 and has identified living expenses of £20k pa. Option 1: take £9340 SP (2021 rate) and £10k6 from pension. Option 2: defer SP and take £20k from pension. If we say that his fund grows 6% pa, normal SP rate pa stays constant (to keep the arithmetic simpler) and that he defers for 5 years we have the following: Option 1 pension pot is £338130 SP is £9340, option 2 pension pot is £282000 SP is £12380 (32.5% / £3k pa more). 
Should Dave die shortly before / after taking his deferred pension his spouse (estate) would receive a £282000 pot as opposed to a £338130 pot, a difference of over £56k (16.5% less). Dave also gave up 5 x £9340 of state pension, which at £46700 means that he would have to survive around 16 years after starting his deferred pension just to break even. So if Dave defers from 67 to 72, he would have to last until 88 (above average male mortality) to be better off. Also bear in mind that if your deferred pension exceeds the personal allowance you'll give 20% of the extra to the tax man!

As you said, each to their own however I will certainly not be deferring. I'll take my SP as soon as I can.

pensionpawn

Linton said:

ukdw said:

Linton said:

Sea_Shell said:

If you defer SP for 1 year, how long do you have to live to "break even"?

Ignoring the effect of inflation (or beyond) increases, which could change the numbers significantly, defering SP breaks even after 17.2 years which is pretty close to the average lifespan.  Defering SP is insurance and like all insurance you only benefit if you need to use it.

But the cost/benefit analysis is more complex that that.  If you die unexpectedly early you would not have benefited by not defering because your financial plan will be based on a long life, so you will just leave more money in yourpension  pot.  You could not have used it because you did not know you were going to die early.

I am currently considering whether to defer the SP myself, my thoughts are:

1. I think you need to add an additional year to the 17.2 figure  to take into account the fact that you won't be able to withdraw the 5.8% extra amount in the first year while the SP is deferred - pushing the simple payback period up to 18.2 years - or age 85 for a 67 year old - which matches the current projected average lifespan for a 67 year old male, and is 2 years ahead of the average 87 for a female.

2. I presume the 17.2 years payback figure applies to 0% tax payers.  20% tax payers would I presume need more like a 23 years - which is beyond average lifespan, and 40% tax payers even more beyond.   EDIT - not sure this point is correct now that I re-read my post

3.  The 17.2 years also I presume is based on the extra £9k cash you have to spend to make for losing state pension only  losing growth at a rate matching pension inflation. - If instead this £9k saved if  is invested in something that gives a greater than inflation return then this would add quite a few extra years to the break even point.  Conversly if the £9k would have been kept as cash it might pull the break even date earler.

4. Finally, I believe all of the payback figures go up by a further year for each additonal year you defer - so deferring 2 years would push the simple payback period to 24 years for a 20% tax payer.

If the above points are correct then I think I will take SP as soon as I can get it.

Point 2 is incorrect assuming that your tax position remains the same. If you are using drawdown then every £ you spend comes from taxed income no matter whether this is SP or a pension pot. Deferring is not costing you £9k per year because that is the gross amount. As a 20% tax payer you would only need to replace £7200 SP.

The object of the exercise is not to make extra return but rather reduce risk in later life. I take the view that money left at death, beyond that needed to support a spouse, is wasted money.  So one aim of retirement financial management is to minimise this without taking the risk of living too long for your finances.

I believe that considered use of SP deferral could enable one to safely drawdown and spend more of one’s own money in the early years since there is less need to retain it for what in most cases has to be a an over estimate of ones lifespan.

This approach could be supplemented by ending deferral and buying an annuity when you reach the age at which annuity rates exceed 5.8%. This would enable you to avoid having to make any estimate of your lifespan and provision for extreme old age since all the risk would lie with the state and the annuity company.

"The object of the exercise is not to make extra return but rather reduce risk in later life."
However one could consider that boosting state pension at the cost of running down a DC pension pot is increasing risk for a couple. SP is an annuity and affords a safety net until you're beamed up. However your SP ends when you do and that sudden loss of a boosted SP now has to be factored in to your overall planning. Where does your spouse turn to when £12k pa suddenly disappears? Bear in mind that a couple could comfortably get by on 2 x SP though struggle on 1 x SP. Once a DC pot reaches a certain value the impact of compounded growth makes it nigh on impossible to be financially insecure at 75+ with 10 (the average) to 20 (very rare) years left on the clock. A £233k pension pot should safely (4%) naturally yield the value of the SP. A £310k pension pot should safely (4%) naturally yield the value of a 5 year boosted SP. Much less if you intend to run your pots down to near zero.

[Deleted User]

pensionpawn said:

Stubod said:

Assuming you are not too fussed about leaving loads to next of kin / charity, it makes sense to me to burn through your "pot" and defer the state pension, particularly if you are a little risk averse. I think it offers around 5% increase for each year deferred?

Why defer your state pension? Yes your SP will increase by around 10% each year however you will then be depleting your private pension instead. This isn't for me as my investments should (are) growing near that rate and secondly, if you croak it before you start taking your pension you've lost a chunk of money that you could have passed to your estate.
I'd be more interested in the opposite, taking your pension earlier at a reduced rate. Also, as with annuities, taking your pension at a reduced rate from your SP age which allows for a significant percentage to be passed onto your wife / husband. 

Its insurance against living too long and running out of money. Delaying SP by a year is a much better value than buying an annuity at the cost of 1 year SP.   Your level of confidence in the 10% annual growth of your investments is very impressive.