state pension take it or leave it.

kidmugsy

The extra State Retirement Pension that deferral gives has two great advantages.
(i) It reduces longevity risk i.e. the risk that you (or your widow) will outlive your money.
(ii) Its payments are index-linked: there are probably no alternative index-linked investments that are as attractive.

Point (ii), however, makes a nonsense of calculations that purport to show a payback time.  Unless you magically know the future course of inflation then the calculations are just phooey.

zagfles

kidmugsy said:

The extra State Retirement Pension that deferral gives has two great advantages.
(i) It reduces longevity risk i.e. the risk that you (or your widow) will outlive your money.
(ii) Its payments are index-linked: there are probably no alternative index-linked investments that are as attractive.

Point (ii), however, makes a nonsense of calculations that purport to show a payback time.  Unless you magically know the future course of inflation then the calculations are just phooey.

No it doesn't, it makes it easier. If £9000 today is worth £9200 tomorrow, then getting paid £9000 today is equivalent of getting paid £9200 tomorrow. It's the same value. So just consider everything in real terms. Of course you may want to apply a "discount rate" to reflect real returns, maybe negative. 

You also need to account for lack of compounding if you defer a number of years, but on the plus side you accrue extra % state pension so the deferred extra increases with the triple lock rather than just CPI. However, this nowhere near makes up for the lack of compounding, so it's diminishing returns the longer you defer, not only because of this but also because you're older and therefore less time for payback.

SomeMadeUpName

So has someone crunched the numbers (% increases, average life expectancy, etc) to work out a generic 'best' deferral period for each gender?  How long you could/should defer for in order to get a gain large enough to get payback before you pike out at the average age.  Probably most meaningful if the average longevity figures from pre Covid were used.

zagfles

SomeMadeUpName said:

So has someone crunched the numbers (% increases, average life expectancy, etc) to work out a generic 'best' deferral period for each gender?  How long you could/should defer for in order to get a gain large enough to get payback before you pike out at the average age.  Probably most meaningful if the average longevity figures from pre Covid were used.

They have here, based on a SPA of 66 by the looks of it: https://icfp.co.uk/deferring-state-pension/

Not sure what assumption they're using about the triple lock excess over CPI, as that makes a difference. 

I've done a back of a fag packet spreadsheet, for average life expectancy it makes very little difference to overall lifetime (real terms) income if you defer up to 2 or 3 years or so, defer more and you're worse off. But if you assume a negative discount rate like annuities effectively do (ie that safe investments don't keep up with inflation), that would swing the equation to deferring longer.

But I don't think seeking to maximise lifetime income based on average life expectancy is very useful, that's a bit like deciding whether or not to buy insurance based on average risk and cost of claiming. A useful benchmark, but not the primary driver. Deferring could be useful to increase guaranteed income in older age, so for someone with say some DB pension provision and a SIPP, and the DB plus state pension are a bit short of their desired income level, they might want to defer the state pension to increase it while drawing on their SIPP till it's empty so they don't need to manage a SIPP in their old age.

Stubod

..a bit of a tricky one to calculate I think? I suppose it depends on whether or not you need some income from the SP age. I am assuming that we will have more than enough to cover at least 2 years, ie if we took the SP at the SP age then we would be drawing down less from savings and investments.

I am assuming deferring the SP by a couple of years is a "safer" overall investment than taking it at SP age and retaining more of our pot in savings / investments?

barnstar2077

Currently, I think that when the time comes I will defer for a few years, because I would rather drain my SIPP first.  If I take both I will just be taxed on most of what I take out of the SIPP, so I may as well use the SIPP up first, then have a much boosted SP that I don't have to think about.  This seems like a good plan while I have no dependants anyway.

sheslookinhot

I intend to take the SP when it becomes available to me, just over 4 years. I will tailor my DB next year such that when added to SP, I remain just below higher tax rate. This will also give me a good TFLS. I will use a SIPP from starting DB pension until SP starts.

kidmugsy

zagfles said:

No it doesn't, it makes it easier.

Do you know, you've persuaded me.

nigelbb

A little known twist is that it is possible to defer even after you have started to draw your state pension. You can only do it once but if you change your mind about deferral after starting to draw your pension then it is worth considering. 

SomeMadeUpName

nigelbb said:

A little known twist is that it is possible to defer even after you have started to draw your state pension. You can only do it once but if you change your mind about deferral after starting to draw your pension then it is worth considering. 

@nigelbb Good tip.  I think maybe in the back of my mind I had seen that, either on another thread here, or in a HMRC guidance sheet or article pointed to from here, but I'ld forgotten it already.
I'm late to this retirement planning party and trying to learn a lot quickly, so some of it is going in, but then out again.