Calculation of Deferred SP

DairyQueen

I wonder whether a decision tree would be an easier way of illustrating the rules/calculations? Given my difficulty in understanding the subtleties, I need something as a reminder to my future self of how this works.

I may make an attempt.

Nothing pensions-related is ever straightforward.

zagfles

jamesd said:

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.

AIUI, with no protected amount, the deferral amount increases with the triple lock while in deferment - as you explained to me in the previous thread! https://forums.moneysavingexpert.com/discussion/comment/78239245/#Comment_78239245

And I looked at the legislation and agreed.

If you have a protected amount, that amount would increase by CPI, as it's a percentage increase to the pension which the pensioner would have been entitled to had they been claiming.

Agreed?

When in payment, the extra earnt through deferment increases with CPI, I think this applies even if the earnt state pension before deferring is below single tier cap, but not sure on this point, you might get triple lock up to the cap.

Audaxer

DairyQueen said:

I wonder whether a decision tree would be an easier way of illustrating the rules/calculations? Given my difficulty in understanding the subtleties, I need something as a reminder to my future self of how this works.

I may make an attempt.

Nothing pensions-related is ever straightforward.

Good idea. I was confused by the protected amount part of the pension.

Whatever the increase percentages are, I'm still not convinced that it is worth deferring SP for even a year, let alone 5 years or more, but I'd have to look at the sums again to be absolutely sure.

MK62

It seems fairly clear to me tbh.......assuming I'm understanding it all correctly that is....

From https://www.gov.uk/new-state-pension/how-its-calculated

The part of your starting amount which is above the full new State Pension is called your ‘protected payment’. This is paid on top of the full new State Pension.

Annual increases

The new State Pension increases each year by whichever is the highest:

• earnings – the average percentage growth in wages (in Great Britain)
• prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 2.5%

If you have a protected payment, it increases each year in line with the CPI.

Any increase from deferring is, AIUI, separate from this.......it's simply what you would be getting had you not deferred at all, plus a percentage on top, in line with the number of weeks the pension was deferred (1% for every 9 weeks). So if you deferred for 90 weeks, the percentage on top would be 10%.

zagfles

MK62 said:

It seems fairly clear to me tbh.......assuming I'm understanding it all correctly that is....

From https://www.gov.uk/new-state-pension/how-its-calculated

The part of your starting amount which is above the full new State Pension is called your ‘protected payment’. This is paid on top of the full new State Pension.

Annual increases

The new State Pension increases each year by whichever is the highest:

• earnings – the average percentage growth in wages (in Great Britain)
• prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 2.5%

If you have a protected payment, it increases each year in line with the CPI.

Any increase from deferring is, AIUI, separate from this.......it's simply what you would be getting had you not deferred at all, plus a percentage on top, in line with the number of weeks the pension was deferred (1% for every 9 weeks). So if you deferred for 90 weeks, the percentage on top would be 10%.

Exactly - so while deferred the deferred amount grows in line with the underlying pension, so up to ST cap by the triple lock, protected amount by CPI. 

Shedman

If the brains on here don't seem to be absolutely certain as to the treatment then I would lay odds on it that the DWP won't get it right....😅

DairyQueen

MK62 said:

It seems fairly clear to me tbh.......assuming I'm understanding it all correctly that is....

From https://www.gov.uk/new-state-pension/how-its-calculated

The part of your starting amount which is above the full new State Pension is called your ‘protected payment’. This is paid on top of the full new State Pension.

Annual increases

The new State Pension increases each year by whichever is the highest:

• earnings – the average percentage growth in wages (in Great Britain)
• prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 2.5%

If you have a protected payment, it increases each year in line with the CPI.

Any increase from deferring is, AIUI, separate from this.......it's simply what you would be getting had you not deferred at all, plus a percentage on top, in line with the number of weeks the pension was deferred (1% for every 9 weeks). So if you deferred for 90 weeks, the percentage on top would be 10%.

Let's not forget the subtlety of increases once in payment.

The extra earned by deferring is increased by CPI but the deferred amount (up to the ST cap) is increased by triple lock or (perhaps) increased by triple lock up to the cap. This last has yet to be established.

MK62

DairyQueen said:

MK62 said:

It seems fairly clear to me tbh.......assuming I'm understanding it all correctly that is....

From https://www.gov.uk/new-state-pension/how-its-calculated

The part of your starting amount which is above the full new State Pension is called your ‘protected payment’. This is paid on top of the full new State Pension.

Annual increases

The new State Pension increases each year by whichever is the highest:

• earnings – the average percentage growth in wages (in Great Britain)
• prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 2.5%

If you have a protected payment, it increases each year in line with the CPI.

Any increase from deferring is, AIUI, separate from this.......it's simply what you would be getting had you not deferred at all, plus a percentage on top, in line with the number of weeks the pension was deferred (1% for every 9 weeks). So if you deferred for 90 weeks, the percentage on top would be 10%.

Let's not forget the subtlety of increases once in payment.

The extra earned by deferring is increased by CPI but the deferred amount (up to the ST cap) is increased by triple lock or (perhaps) increased by triple lock up to the cap. This last has yet to be established.

I'm not sure there is any subtlety really tbh.....your state pension amount is calculated based on your national insurance record up to state pension age. That calculation won't change after that. Annual inflation increases are applied each April.....triple lock up the NSP level, CPI on anything above
If you defer, a percentage is then added on, based on the number of weeks the pension was deferred.

So, if you deferred for 90 weeks, your state pension will be whatever it would have been had you not deferred, plus 10% (1% for each 9 weeks).

zagfles

MK62 said:

DairyQueen said:

MK62 said:

It seems fairly clear to me tbh.......assuming I'm understanding it all correctly that is....

From https://www.gov.uk/new-state-pension/how-its-calculated

The part of your starting amount which is above the full new State Pension is called your ‘protected payment’. This is paid on top of the full new State Pension.

Annual increases

The new State Pension increases each year by whichever is the highest:

• earnings – the average percentage growth in wages (in Great Britain)
• prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 2.5%

If you have a protected payment, it increases each year in line with the CPI.

Any increase from deferring is, AIUI, separate from this.......it's simply what you would be getting had you not deferred at all, plus a percentage on top, in line with the number of weeks the pension was deferred (1% for every 9 weeks). So if you deferred for 90 weeks, the percentage on top would be 10%.

Let's not forget the subtlety of increases once in payment.

The extra earned by deferring is increased by CPI but the deferred amount (up to the ST cap) is increased by triple lock or (perhaps) increased by triple lock up to the cap. This last has yet to be established.

I'm not sure there is any subtlety really tbh.....your state pension amount is calculated based on your national insurance record up to state pension age. That calculation won't change after that. Annual inflation increases are applied each April.....triple lock up the NSP level, CPI on anything above
If you defer, a percentage is then added on, based on the number of weeks the pension was deferred.

So, if you deferred for 90 weeks, your state pension will be whatever it would have been had you not deferred, plus 10% (1% for each 9 weeks).

There is some subtlety, as after eg deferring a full NSP with no protected element for 90 weeks your state pension will be 110% of what it would have been, but only at the start. The extra 10% will only increase with CPI, whereas the 100% will increase with the triple lock. After 10 years, your "extra 10%" would be an extra 8.6% if the triple lock exceeds CPI by 1.5% on average. 

Although more subtle than I thought!

MK62

Why will the extra 10% only increase by CPI?
It's protected payments which will increase by CPI only.....and in this case there isn't one. 
My understanding is that if you defer a full NSP for 90 weeks, you'll then get the full NSP plus 10%..........and will always get full NSP plus 10% for the rest of your life......perhaps only the DWP could confirm though, either way.