Deferred State pension then passing away before claiming anything

Stubod

zagfles said:

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.

..just out of interest, (and seeing you already have the calcs), what is the actual cost benefit of deferring 1,2 and 3 years?...ie what extra would you get over just taking the SP at 66?

zagfles

Stubod said:

zagfles said:

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.

..just out of interest, (and seeing you already have the calcs), what is the actual cost benefit of deferring 1,2 and 3 years?...ie what extra would you get over just taking the SP at 66?

Mine's based on SPA at 67, but should be similar - 1 year deferral (based on above assumptions and death at 90) is gain of £2699, 2 years £4511, 3 years £5392, then it starts going down and is negative at 7 years. Lifetime total income difference, so quite small numbers really.

But I think the real benefit of deferring isn't to try to maximise lifetime income, it's to secure income which can hedge against DC returns and "risk" of living longer that your money lasts. Like buying an annuity, but better value.

Stubod

..ta for that....hardly seems worth it, particularly given the lack of spouse payout if you beam up early?

Notepad_Phil

Stubod said:

..ta for that....hardly seems worth it, particularly given the lack of spouse payout if you beam up early?

We're almost definitely going to do it for Mrs Notepad - she's less interested in investments than myself so I'd like to max her guaranteed income as much as possible, plus as we're the same age and in good health she's likely to receive the increases past my demise.

jamesd

zagfles said:

But I think the real benefit of deferring isn't to try to maximise lifetime income, it's to secure income which can hedge against DC returns and "risk" of living longer that your money lasts. Like buying an annuity, but better value.

Right. And it pays out above SWRs so you actually increase total income or remaining inheritance.

The combination of above SWR income and longevity insurance is very attractive, with suitable life expectancy. The longevity insurance aspect tends to be under-valued.

jamesd

zagfles said:

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. 

I don't follow your logic there. If triple lock is 2% and inflation 1.5% then if you defer for three years what started out as 9000 a year original state pension is nominally (not inflation adjusted):

9000 * 1.02 ^ 3 = 9550.87

Claim now and the increase is 3*5.8% * 9550.87 = 1661.85

But that's nominal, so let's look at real, AKA today's money. Here the triple lock excess of 0.5% over inflation is the real value of the annual pension uprating, so

9000 * 1.005 ^ 3 = 9135.67

And the deferral increase based on this is 3*5.8% * 9135.67 = 1589.60.

I don't see the relevance of the triple lock excess over CPI to the 5.8% increase, since that's always 5.8% and the underlying pension on which the increase has been calculated is increased by triple lock each year.

Yes, the 5.8% increase if you claimed after year one gets CPI instead of triple lock but it's the extra 5.8% for an extra year of deferring (as well as triple lock excess over inflation on the first year's 5.8%) that matters most. But why claim the excess of triple lock over inflation is diminishing returns when it's increasing - the longer you defer each year's 5.8%, the longer that year gets triple lock instead of inflation increases?

There is a strong diminishing returns component to this but it's life expectancy.

jamesd

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 don't agree that over the long term we could achieve 5.8% plus inflation returns. About 5% plus inflation is the UK historic average. I'd agree with 5.8% minus inflation, say 3.8% after inflation if we assume the BoE achieves it's 2% target.

In that case, how you value the SPs longevity and sequence of returns risk protection matters.

It's sequence of returns risk that takes an average of 5% return and makes it a 3.8% safe withdrawal rate. Crudely, what happens if you experience a 50% drop in year one that doesn't recover for ten years then recovers fully for ten more years before you die. Vs staying the same for the first ten years then halving. Same average performance but the first case drains capital much more rapidly because you're drawing on it while it's down.

pensionpawn

All academic if you give up the ghost just prior to activating your delayed SP. For a couple SP is £18,678.40 pa tax free. That's over half of what of we want to retire on and over three quarters of what we actually need. I'll take it as soon as it's available thanks as a delayed SP would also reduce the withdrawal rate from preferred retirements age (e.g. 57) to SP age. Out of interest does your modelling examine how the reduction in SIPP value, to fund the delayed SP, impacts withdrawals against SWR if one spouse does die just prior to taking a delayed SP? The planing would have assumed a much higher combined SP, due to the deferral increase, and this will now have to be recovered from the depleted SIPP.

zagfles

jamesd said:

zagfles said:

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. 

I don't follow your logic there. If triple lock is 2% and inflation 1.5% then if you defer for three years what started out as 9000 a year original state pension is nominally (not inflation adjusted):

9000 * 1.02 ^ 3 = 9550.87

Claim now and the increase is 3*5.8% * 9550.87 = 1661.85

But that's nominal, so let's look at real, AKA today's money. Here the triple lock excess of 0.5% over inflation is the real value of the annual pension uprating, so

9000 * 1.005 ^ 3 = 9135.67

And the deferral increase based on this is 3*5.8% * 9135.67 = 1589.60.

I don't see the relevance of the triple lock excess over CPI to the 5.8% increase, since that's always 5.8% and the underlying pension on which the increase has been calculated is increased by triple lock each year.

Yes, the 5.8% increase if you claimed after year one gets CPI instead of triple lock but it's the extra 5.8% for an extra year of deferring (as well as triple lock excess over inflation on the first year's 5.8%) that matters most. But why claim the excess of triple lock over inflation is diminishing returns when it's increasing - the longer you defer each year's 5.8%, the longer that year gets triple lock instead of inflation increases?

There is a strong diminishing returns component to this but it's life expectancy.

To make it easier to understand, pretend the triple lock doesn't exist and all increases are all CPI. And think real terms, so the pension (assume 9000) stays at 9000 in real terms all your life if you take it at SPA.

If you defer a year, you now have two bits, the 9000 pension plus the reward for deferring, £522.

If you defer another year, you are deferring both bits. You get another £522 for deferring the main pension. But you get zero reward for deferring the first year's £522 due to no compounding. So overall, in the second year, you get an increase less than 5.8%, you get 522/(9522) = 5.48%. And so on, the reward get smaller with each passing year, as well as being worth less due to a year's less life expectancy so the increase will be paid a year less.

But because of the triple lock, you do get a bit of a reward for deferring the increase you've already earned in previous years, because the increase is a percentage of the pension when you take it. As we're doing everythig real terms, that increase on previously earned increases is triple lock minus CPI.

Model it in a spreadsheet and work out the % increase year on year if it's not conceptually obvious to you.

michaels

One way of looking at it is that you are spending 9.4k buying a single life index linked annuity at a cost of 5.8% - compare that to how much the market would charge for this annuity should give a good idea of the value of deferring. (slight complication is that the annuity doesn't start paying out for 12 months so probably you need to compare against the price of said annuity at age 68 rather than 67 and if you are being pedantic you should cpi reduce the 9.4k as you are buying the annuity using todays money even though it doesn't start for 12 months)