Deferred State pension then passing away before claiming anything

jamesd

The deferral increase is 5.8% plus inflation increases. Thirty years of £522 extra is £15,660 in today's money.

The 9k grows only at 0.5% if inflation is to two percent so after thirty years it's worth £9,944 in today's money.

pensionpawn

jamesd said:

The deferral increase is 5.8% plus inflation increases. Thirty years of £522 extra is £15,660 in today's money.

The 9k grows only at 0.5% if inflation is to two percent so after thirty years it's worth £9,944 in today's money.

I just can't see the benefit of deferring. Two reasons: the first is the main point, there is no widow(er) entitlement, so use it before you lose it. You can pass on your SIPP so why erode that in preference to taking your SP which dies when you do? The second point is I very much hope that my SIPP growth is better than 5.8%, hence wiser to withdraw less from your SIPP in preference to deferring the SP. You're wealth (to pass on?) will increase the longer you last! The logical extension is allowing early withdraw of SP (due to health issues and regional variations in mortality). For example if you take your SP a year earlier then it's reduced by 5.8%.....

jamesd

You and I can hope to do better than 5.8% growth but since the long term average return on UK equities is about 5% plus inflation we're likely to be disappointed.

Safe withdrawal rates vary with method used, investment mix and time but with 3.8% for 4% rule or 5.5% initially for Guyton-Klinger, both before costs, the 5.8% increases the safe income level and guarantees it if you live longer than expected.

zagfles

Is there a full guide to this somewhere, rather than the scant information on gov.uk? The way the extra you get increases in payment is clear, but in deferral it's not.

For instance, does the 1% per 9 weeks compound? If so, every 9 weeks, or annually?

Or does the extra % apply to the state pension value at the date you put it into payment?

For instance, say you're entitled to the full new state pension. You want to defer for a year before taking it.

Is the extra you get when put it into payment next year 5.8% of next year's state pension (ie increased with the triple lock), or is it 5.8% of this year's state pension plus CPI?

Stubod

Hi all and thanks for the feedback. I was considering deferring for a year or two as my only other "income"/pension is a smallish deferred works pension which is not subject to any index linking. I have the option to spend down some SIPPS /  savings and investments to bridge the gap, but after reading some of the above comments it seems to make more sense to actually take the SP when it becomes available, particularly if there are no spouse benefits if you pop your clogs before you actually start taking it, (which seems a bit unfair to me).

jamesd

zagfles said:

For instance, say you're entitled to the full new state pension. You want to defer for a year before taking it.

Is the extra you get when put it into payment next year 5.8% of next year's state pension (ie increased with the triple lock), or is it 5.8% of this year's state pension plus CPI?

There's no compounding if the increase percentages so two years is 5.8% times two increase.

This uncompounded increase us applied to the pension rate at the time you claim, so you get all triple lock increases until that point. After claiming the extra gets CPI not triple lock.

This answer assumes that you are a resident of the UK or other place where inflation increases happen for the whole duration of deferring and claiming, else you may have some years with no increase at all in the state pension, including and deferral increase.

zagfles

jamesd said:

zagfles said:

For instance, say you're entitled to the full new state pension. You want to defer for a year before taking it.

Is the extra you get when put it into payment next year 5.8% of next year's state pension (ie increased with the triple lock), or is it 5.8% of this year's state pension plus CPI?

There's no compounding if the increase percentages so two years is 5.8% times two increase.

This uncompounded increase us applied to the pension rate at the time you claim, so you get all triple lock increases until that point. After claiming the extra gets CPI not triple lock.

This answer assumes that you are a resident of the UK or other place where inflation increases happen for the whole duration of deferring and claiming, else you may have some years with no increase at all in the state pension, including and deferral increase.

Yes I've just been looking at the legislation and that seems to agree

https://www.legislation.gov.uk/ukpga/2014/19/section/17

https://www.legislation.gov.uk/uksi/2015/173/regulation/10/made

So over multiple years deferment, the benefit would likely reduce as the triple lock excess over CPI is likely to be a lot less than 5.8%. Because the benefit of deferring the increase you "earned" in the first year of deferment is triple lock minus CPI (since you'd have got CPI increases had it been in payment), so it's a case of diminishing returns. Plus of course the benefit of deferral reduces as you get older as obviously the number of extra years you're likely to live reduces. There's probably some optimum number of years based on life expectancy.

But still, it's very useful for eg people who have a DB pension which is short of what their "number" is in retirement, as they could use state pension deferment to get to their number at a particular age, which means they could have a cut off age when their DC/other savings can be used up.

For instance, using approx figures, and assuming investments keep up with inflation, someone wants to retire at 60 and has a DB pension payable at SPA of 67 of £12k, state pension say £9k, their "number" is £25k. So they're £4k short after SPA, and £25k short between 60 and 67. So they need £25k x 7 plus £4k x the number of years they live over 67, obviously unknown.

If they defer state pension till 75, it'll be about £13k. So with their DB pension they have their "number" of £25k from age 75. So they can calculate exactly how much they'll need to age 75, and from 75 they can live off just state plus DB pension, also having the advantage that they don't need to worry about investments, drawdown strategy etc once they get to an age at which ability to do such things will likely decline.

pensionpawn

jamesd said:

You and I can hope to do better than 5.8% growth but since the long term average return on UK equities is about 5% plus inflation we're likely to be disappointed.

Safe withdrawal rates vary with method used, investment mix and time but with 3.8% for 4% rule or 5.5% initially for Guyton-Klinger, both before costs, the 5.8% increases the safe income level and guarantees it if you live longer than expected.

I have been seeing well over twice 5.8% over the last 12 months and well over 5.8% over the last 30 years however, as I don't want us to spiral off the original topic, if we agree that we could achieve just 5.8% through a SIPP from SPA until being beamed up surely it's still better to take the SP straight away? I view SP as a good annuity that offsets what I would then draw from my SIPP up to a minimum of the personal allowance. Tomorrow isn't promised, I'm not going to be over prudent and miss out on enjoying the wealth that I've generated! Besides the financial misery of the second half of the 1970's and the early 1980's we've had the two most damaging fiscal nightmares in my adult life, the banking crises and the pandemic. If life has anything worse than those to throw at us I believe that staying alive (as opposed to minimising downturns in my portfolio) will be the priority!

zagfles

pensionpawn said:

jamesd said:

You and I can hope to do better than 5.8% growth but since the long term average return on UK equities is about 5% plus inflation we're likely to be disappointed.

Safe withdrawal rates vary with method used, investment mix and time but with 3.8% for 4% rule or 5.5% initially for Guyton-Klinger, both before costs, the 5.8% increases the safe income level and guarantees it if you live longer than expected.

I have been seeing well over twice 5.8% over the last 12 months and well over 5.8% over the last 30 years however, as I don't want us to spiral off the original topic, if we agree that we could achieve just 5.8% through a SIPP from SPA until being beamed up surely it's still better to take the SP straight away? I view SP as a good annuity that offsets what I would then draw from my SIPP up to a minimum of the personal allowance. Tomorrow isn't promised, I'm not going to be over prudent and miss out on enjoying the wealth that I've generated! Besides the financial misery of the second half of the 1970's and the early 1980's we've had the two most damaging fiscal nightmares in my adult life, the banking crises and the pandemic. If life has anything worse than those to throw at us I believe that staying alive (as opposed to minimising downturns in my portfolio) will be the priority!

You haven't ignore the "above inflation" bit have you? Historic equity returns are around 3-5% above inflation, before charges. So maybe 3.5% average after charges if you use low cost investments. Obviously been higher recently, although the FTSE is lower than 20 years ago and the Japanese market is lower than 30 years ago. Others eg US have done better, and most of the research around SWRs are based on US studies.

zagfles

Just been playing around modelling in a spreadsheet. Based on using "real" amounts in CPI terms, and assuming the triple lock exceeds CPI by 1.5%, SPA of 67, death at 90, deferring 3 years till 70 gives highest total lifetime "real" income from state pension. Obviously very sensitive to age of death, if 100 then deferring 10 years to 77 is the best. Not too sensitive on the triple lock excess.