Calculation of Deferred SP

DairyQueen

Could anyone answer the following please? 

 If SP is deferred (nSP) then it escalates at slightly less than 5.8%p.a. throughout the period of deferral, but on what value is the 5.8% applied?:

 a)     5.8% p.a. from the point of deferral?

OR

 b)    5.8% p.a. from the point at which the deferred pension is taken?

 

For example:

Full nSP 2021/22 = 179.60 per week

Ditto 2022/23 = £185.15

If deferred from 2021 to 2022 (one year) would the amount received = 

a)     £179.60*105.8% = £190.02?

OR

b)    185.15*105.8% = £195.89?

Or something else?

TIA

xylophone

If deferred from 2021 to 2022 (one year) would the amount received = 
a)     £179.60*105.8% = £190.02?

https://www.gov.uk/deferring-state-pension/what-you-get

Your State Pension increases by the equivalent of 1% for every 9 weeks you defer. This works out as just under 5.8% for every 52 weeks.

The extra amount is paid with your regular State Pension payment.

Example:You get £179.60 a week (the full new State Pension).

By deferring for 52 weeks, you’ll get an extra £10.42 a week (just under 5.8% of £179.60).

This example assumes there is no annual increase in the State Pension. If there is an annual increase, the amount you could get could be larger.

https://www.which.co.uk/money/pensions-and-retirement/state-pension/deferring-your-state-pension-ahr9w8p0f87w

Audaxer

DairyQueen said:

For example:

Full nSP 2021/22 = 179.60 per week

Ditto 2022/23 = £185.15

If deferred from 2021 to 2022 (one year) would the amount received = 

a)     £179.60*105.8% = £190.02?

OR

b)    185.15*105.8% = £195.89?

Or something else?

TIA

The guidance isn't very clear, but I would think it has to be b) above, because under the triple lock the maximum pension could be increased greater than 5.8%. For example that could have happened next year if they hadn't suspended the triple lock because of the possibility of an 8% rise due to earnings. If that had happened, it wouldn't make sense for someone that has deferred their pension to get 'only' 5.8% on the existing amount, whereas someone that hadn't deferred would get a higher rise due to the triple lock. So I would think those who have deferred would get the triple lock rise and the 5.8%.

DairyQueen

I just spotted a recent response to another thread posted by @jamesd . He states that the SP is increased by CPI (not the triple lock) before the 5.8% p.a. uplift is applied so it would appear that @xylophone's post referring to 'assuming no annual increase' is correct. 

As you say @Audaxer, government guidance is clear as mud. 

I still haven't found anything definitive (i.e. government advice) on the web which confirms this is the correct calculation but James's advice is good enough for me.

ukdw

https://www.gov.uk/deferring-state-pension/what-you-get

My understanding, I think confirmed by reading this is that the appx 5.8% additional pension you build up each deferred year will be based on what you would have got that year from normal triple protected SP..  I.e, The absolute additional amount you build up for each deferred year will increase by the triple lock percentage.

However the extra 5.8% parts built up from previous years will neither benefit from triple lock, or will be included in the 5.8% extra calculation for further deferred years. They will however be increased my CPI. 

So the deferred extra part of the SP will effectively become an extra mini pension that is increased each year by CPI, plus further blocks of appx 5.8% of the main SP entitlement if it is still deferred.

jamesd

DairyQueen said:

I just spotted a recent response to another thread posted by @jamesd . He states that the SP is increased by CPI (not the triple lock) before the 5.8% p.a. uplift is applied so it would appear that @xylophone's post referring to 'assuming no annual increase' is correct. ...

I still haven't found anything definitive (i.e. government advice) on the web which confirms this is the correct calculation but James's advice is good enough for me.

If jamesd appears to say that, jamesd would like to know which post so jamesd can clarify it.

When you stop deferring every increase in the state pension between the time of starting to defer and the time you end deferring is applied at the usual rates. That would normally be triple lock on the amount up to the single tier pension cap and CPI on the amount above that, if any (preserved earnings-related increase usually). Once the correct current year value for the unincreased pension is calculated, the 5.8% per year pro-rated increase is added to it. The increase itself gets CPI increases.

If you deferred by two years you get two times 5.8% increase, for five years, five times 5.8% increase. The increase percentage doesn't get compounded by inflation.

This all assumes that you've spent the whole time in countries where there is an annual increase. If any time was outside such countries you'll lose some of the normal annual increases for that amount of time.

jamesd

DairyQueen said:

Could anyone answer the following please? 

 If SP is deferred (nSP) then it escalates at slightly less than 5.8%p.a. throughout the period of deferral, but on what value is the 5.8% applied?:

 a)     5.8% p.a. from the point of deferral?

OR

 b)    5.8% p.a. from the point at which the deferred pension is taken?

 

For example:

Full nSP 2021/22 = 179.60 per week

Ditto 2022/23 = £185.15

If deferred from 2021 to 2022 (one year) would the amount received = 

a)     £179.60*105.8% = £190.02?

OR

b)    185.15*105.8% = £195.89?

Or something else?

TIA

It's b.

CPI gets involved in the annual increases if you started at say 200 a week because of earnings-related additional state pension. Up to the 179.60 gets the triple or double lock and the bit above it gets CPI when working out the base 2022/23 value.

Albermarle

I know that there can be some circumstances where deferring SP can be part of a strategy .
However in general terms it does not seem such a good dea, unless I am calculating wrongly .
For example ( ignoring inflation /triple lock increases etc )
Current SP is £9340 pa available at age 66 .
Defer for 5 years and die at average life expectancy of 85.
Deferred pension would be £12050 , which you would take for 14 years = £168,700 in total .
Without deferral £9340 X 19 years = £177, 460 

OK if you lived one more year than average , you start to gain . On the other hand you are risking dying early and losing out a lot, maybe even zero.

Does not seem that attractive overall , unless you can get some tax benefit by deferring. If you were still working and a 40% tax payer for example ?

Linton

Albermarle said:

I know that there can be some circumstances where deferring SP can be part of a strategy .
However in general terms it does not seem such a good dea, unless I am calculating wrongly .
For example ( ignoring inflation /triple lock increases etc )
Current SP is £9340 pa available at age 66 .
Defer for 5 years and die at average life expectancy of 85.
Deferred pension would be £12050 , which you would take for 14 years = £168,700 in total .
Without deferral £9340 X 19 years = £177, 460 

OK if you lived one more year than average , you start to gain . On the other hand you are risking dying early and losing out a lot, maybe even zero.

Does not seem that attractive overall , unless you can get some tax benefit by deferring. If you were still working and a 40% tax payer for example ?

Pension deferral is the best way to provide extra inflation linked income should you live a long time, but is not too helpful if you aim to die rich.  It is a much better deal than an inflation linked annuity.

DairyQueen

jamesd said:

DairyQueen said:

I just spotted a recent response to another thread posted by @jamesd . He states that the SP is increased by CPI (not the triple lock) before the 5.8% p.a. uplift is applied so it would appear that @xylophone's post referring to 'assuming no annual increase' is correct. ...

I still haven't found anything definitive (i.e. government advice) on the web which confirms this is the correct calculation but James's advice is good enough for me.

If jamesd appears to say that, jamesd would like to know which post so jamesd can clarify it.

When you stop deferring every increase in the state pension between the time of starting to defer and the time you end deferring is applied at the usual rates. That would normally be triple lock on the amount up to the single tier pension cap and CPI on the amount above that, if any (preserved earnings-related increase usually). Once the correct current year value for the unincreased pension is calculated, the 5.8% per year pro-rated increase is added to it. The increase itself gets CPI increases.

If you deferred by two years you get two times 5.8% increase, for five years, five times 5.8% increase. The increase percentage doesn't get compounded by inflation.

This all assumes that you've spent the whole time in countries where there is an annual increase. If any time was outside such countries you'll lose some of the normal annual increases for that amount of time.

Apologies, this thread:
https://forums.moneysavingexpert.com/discussion/comment/78780950#Comment_78780950

Would be much appreciated if you could confirm I have understood the calculation by reference to the following example:

Full SP 2021/22 = 179.60 per week (maximum single tier, no additional preserved amount)

Ditto 2022/23 = £185.15 (actual, includes inflationary increase notwithstanding triple-lock suspension)

Ditto 2023/24 = £190.00 (projected, includes whatever inflationary increase is applied to single tier amount that year - triple/double lock/something else).

If deferred from 2021 to 2023 (exactly two years) uplift would be 2 x 5.8% so the amount received would be:

£190.00*111.6% = £212.04.

i.e. Similar to a late retirement factor on a DB scheme?  Have I understood how this works? 

I ask as Mr DQ is pushing toward a LTA breach (all his pensions are crystallised) and we are trying to work out whether deferring SP for x years would be preferable to paying the tax penalty. And, if so, how many years of deferral would be best.

DairyQueen

Thanks for all of the helpful replies. I think I now understood how this works.