Calculation of Deferred SP

Audaxer

DairyQueen said:

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, I also misunderstood the other thread from @jamesd, and I'm still not sure I fully understand how it works.

Just to clarify, in your example above, does that mean once you get the deferred pension total amount of £212.04, the original un-deferred part of the pension (£190) will increase by the triple lock in subsequent years, and the deferred increase (£22.04) will increase by CPI in subsequent years?

zagfles

jamesd said:

zagfles said:

Optimal deferral likely to be less than 5 years, maybe 2 or 3, see https://forums.moneysavingexpert.com/discussion/6258487/deferred-state-pension-then-passing-away-before-claiming-anything/p2

Actual optimal depends on circumstances, notably what else the money will be used for if you're confining optimal to mean only break even point and ignoring long life provision. Economist Sir John Kay even went so far as to provide a calculator to help those who want to use only the break even measure and ignore the rest of what makes an optimal choice.

It appear from the formula he uses that he is assuming the state pension increases with inflation. It doesn't, it increases with the triple lock (well usually anyway, double lock this year). I think if you go as far as accounting for NPV using expected returns, you also need to account for the difference between CPI and the triple lock. Earnings generally rise faster than inflation, and the BoE inflation target is 2%, under the 2.5% floor for the triple lock, so it's likely the triple lock will result in the state pension increasing in real terms. 

Having said that, his results with real returns of 0 do seem to mostly tally with my back of a fag packet spreadsheet (I didn't account for NPV, ie assumed real returns of zero, but did assume a 1.5% real increase over CPI due to the triple lock).

zagfles

Audaxer said:

DairyQueen said:

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, I also misunderstood the other thread from @jamesd, and I'm still not sure I fully understand how it works.

Just to clarify, in your example above, does that mean once you get the deferred pension total amount of £212.04, the original un-deferred part of the pension (£190) will increase by the triple lock in subsequent years, and the deferred increase (£22.04) will increase by CPI in subsequent years?

Yes. See the thread I linked above, which links to the legislation. My understanding is that assuming a full pension, deferring gets you 1% extra for every 9 weeks. That 1% applies to the state pension at the time you take it. So if you defer for 90 weeks, you get 110% of the state pension at that time. Once in payment, the extra 10% only gets CPI protection, not triple lock.

DairyQueen

Audaxer said:

DairyQueen said:

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, I also misunderstood the other thread from @jamesd, and I'm still not sure I fully understand how it works.

Just to clarify, in your example above, does that mean once you get the deferred pension total amount of £212.04, the original un-deferred part of the pension (£190) will increase by the triple lock in subsequent years, and the deferred increase (£22.04) will increase by CPI in subsequent years?

That isn't as I understand it.

Once in payment, I believe that the whole amount (inc the deferred uplift) will be subject to whatever increase is applied to the single tier. So, the entire £212.04 (in the example) will be inflation linked equal to the single tier uplift.

Unless I have misunderstood (yet again).

The CPI issue is a bit of a red herring. If I understand correctly, then any protected amount (above the single tier max) is only subject to CPI increases whilst the SP is in deferment. So, whilst in deferment, up to the max single tier receives triple lock increase (or whatever has been specified by government) whilst the  protected balance is only subject to CPI increases. What happens to the protected amount once in payment I have no idea. 

zagfles

DairyQueen said:

Audaxer said:

DairyQueen said:

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, I also misunderstood the other thread from @jamesd, and I'm still not sure I fully understand how it works.

Just to clarify, in your example above, does that mean once you get the deferred pension total amount of £212.04, the original un-deferred part of the pension (£190) will increase by the triple lock in subsequent years, and the deferred increase (£22.04) will increase by CPI in subsequent years?

That isn't as I understand it.

Once in payment, I believe that the whole amount (inc the deferred uplift) will be subject to whatever increase is applied to the single tier. So, the entire £212.04 (in the example) will be inflation linked equal to the single tier uplift.

Unless I have misunderstood (yet again).

The CPI issue is a bit of a red herring. If I understand correctly, then any protected amount (above the single tier max) is only subject to CPI increases whilst the SP is in deferment. So, whilst in deferment, up to the max single tier receives triple lock increase (or whatever has been specified by government) whilst the  protected balance is only subject to CPI increases. What happens to the protected amount once in payment I have no idea. 

You've got it the wrong way round. You earn % increases. Those % increases apply to the state pension at the time you take it. So the amount you've earned by deferring increases with the triple lock. But once in payment, the amount over the "max" single tier only increases with CPI.

However, you earn nothing from having to defer the amount you've already deferred for longer, ie no compounding, which reduces the effective return the longer you defer for.

Audaxer

DairyQueen said:

Audaxer said:

DairyQueen said:

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, I also misunderstood the other thread from @jamesd, and I'm still not sure I fully understand how it works.

Just to clarify, in your example above, does that mean once you get the deferred pension total amount of £212.04, the original un-deferred part of the pension (£190) will increase by the triple lock in subsequent years, and the deferred increase (£22.04) will increase by CPI in subsequent years?

That isn't as I understand it.

Once in payment, I believe that the whole amount (inc the deferred uplift) will be subject to whatever increase is applied to the single tier. So, the entire £212.04 (in the example) will be inflation linked equal to the single tier uplift.

Unless I have misunderstood (yet again).

The CPI issue is a bit of a red herring. If I understand correctly, then any protected amount (above the single tier max) is only subject to CPI increases whilst the SP is in deferment. So, whilst in deferment, up to the max single tier receives triple lock increase (or whatever has been specified by government) whilst the  protected balance is only subject to CPI increases. What happens to the protected amount once in payment I have no idea. 

By "any protected amount (above the single tier max)" do you mean the 5.8% deferment increases?

DairyQueen

Audaxer said:

DairyQueen said:

Audaxer said:

DairyQueen said:

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, I also misunderstood the other thread from @jamesd, and I'm still not sure I fully understand how it works.

Just to clarify, in your example above, does that mean once you get the deferred pension total amount of £212.04, the original un-deferred part of the pension (£190) will increase by the triple lock in subsequent years, and the deferred increase (£22.04) will increase by CPI in subsequent years?

That isn't as I understand it.

Once in payment, I believe that the whole amount (inc the deferred uplift) will be subject to whatever increase is applied to the single tier. So, the entire £212.04 (in the example) will be inflation linked equal to the single tier uplift.

Unless I have misunderstood (yet again).

The CPI issue is a bit of a red herring. If I understand correctly, then any protected amount (above the single tier max) is only subject to CPI increases whilst the SP is in deferment. So, whilst in deferment, up to the max single tier receives triple lock increase (or whatever has been specified by government) whilst the  protected balance is only subject to CPI increases. What happens to the protected amount once in payment I have no idea. 

By "any protected amount (above the single tier max)" do you mean the 5.8% deferment increases?

I meant any protected amount above the single tier max earned via contracting-in prior to 2016 (S2P/SERPS).

jamesd

While deferring the usual triple lock up to the single tier cap and CPI increases on the protected amount above it are applied to the state pension. Protected amount normally being earnings-related state pension. Protected amounts never have and never do get more than CPI increases, whether you've never deferred, are deferring or have ended deferring.

Once you stop deferring you continue to get triple lock increases up to the single tier cap and CPI increases on the protected amount, with the increase due to deferring being treated as a protected amount. That is, never more than CPI for the increase due to deferring.

To put this another way:

While deferring the pension gets all the the increases it would have got if you weren't deferring, they just aren't being paid out to you.

The increase from deferring gets CPI and only CPI increases.

jamesd

NedS said:

When considering the value of deferring SP, besides the obvious comparison with an equivalent annuity, I would also compare it to the fixed income portion of a drawdown portfolio.

For example, (and taking the SP as £10k for the sake of round numbers), imagine a couple with a DC pot of £40k and want a 50:50 split between equities and 'safe' bonds/fixed income. What returns are their Gov bonds likely to offer? 5.8% inflation linked? Where else could they invest their non-equity portion of their portfolio to achieve very low / zero risk 5.8% inflation-linked returns?

Consider each member of the couple defers their SP for one year, at a total cost of £20k - that's the fixed income portion of the portfolio taken care of, and they have effectively bought a life annuity at 5.8% inflation linked with 50% payout to the spouse (whilst they are both alive they jointly receive the full amount. When one dies, the survivor continues to receive half the joint amount). Would £20k buy a £1160 inflation linked annuity with 50% spousal protection at SRA?

Whether this represents value I think will depend on how much guaranteed income you already have from DB pensions etc. If you only have DC assets, then I think buying some guaranteed inflation-linked income at 5.8% looks like a good deal.

Yes, that's an interesting way of looking at it: remembering that the money being considered here (the part not earmarked for inheritance) exists to provide income. You can short circuit the whole investment aspect by just buying that income. I've read assorted retirement research blogs mentioning this aspect recently and the state pension is a really good way to do it in current UK market conditions for investments and annuities.

I'm very comfortable with investment-provided income but even so, it's nice to have guaranteed income that'll underpin the investment side, particularly when it'll let me increase the investment level of income by reducing success rate because the risk of failure is now lower.

jamesd

zagfles said:

It appear from the formula he uses that he is assuming the state pension increases with inflation. It doesn't, it increases with the triple lock (well usually anyway, double lock this year). I think if you go as far as accounting for NPV using expected returns, you also need to account for the difference between CPI and the triple lock. Earnings generally rise faster than inflation, and the BoE inflation target is 2%, under the 2.5% floor for the triple lock, so it's likely the triple lock will result in the state pension increasing in real terms. 

Having said that, his results with real returns of 0 do seem to mostly tally with my back of a fag packet spreadsheet (I didn't account for NPV, ie assumed real returns of zero, but did assume a 1.5% real increase over CPI due to the triple lock).

He does but it doesn't matter because we're considering the deferral time here and the deferral amount does increase with CPI. 

Do you fancy taking a(nother) shot at explaining annual increases up to the single tier cap, to protected amounts and to the increase from deferring? A wrinkle to consider in the wording is if a person starts below the cap some of the single tier increase will be on amounts below the cap which I think still get only CPI not triple lock.