Defer state pension?

aroominyork

My wife turns 66 in late December 2023 so can start drawing her state pension then (a max of £7246 because she moved to the UK in 2001). She is likely to be working a few years more so should she defer? The pension increases 5.8% for each year deferred and, from my calculations, if she defers for one year she would not receive more as a lifetime total until 18 years after she begins drawing, with that time period reducing by 6 months for each additional year she defers (the green cells show). It seems sensible to draw it immediately unless there are tax reasons otherwise such as it making you a higher rate taxpayer (which she already is, but she could reclaim the higher rate tax on earnings and state pension through SIPP contributions). Is this analysis correct?

JoeCrystal

Have you considered the inflation? I am unsure how the inflation linking works with the deferred state pension, though?

coyrls

And taxation, particularly if adding the pension would push your wife into the 40% tax band.

aroominyork

JoeCrystal said:

Have you considered the inflation? I am unsure how the inflation linking works with the deferred state pension, though?

I think you have to assume real terms increases, otherwise it becomes crazily complicated.

xylophone

And taxation, particularly if adding the pension would push your wife into the 40% tax band.

OP says

 It seems sensible to draw it immediately unless there are tax reasons otherwise such as it making you a higher rate taxpayer (which she already is, 

In the OP's wife's position, my inclination would be to draw the SP and contribute to a SIPP as mooted by the OP.

coyrls

xylophone said:

And taxation, particularly if adding the pension would push your wife into the 40% tax band.

OP says

 It seems sensible to draw it immediately unless there are tax reasons otherwise such as it making you a higher rate taxpayer (which she already is, 

In the OP's wife's position, my inclination would be to draw the SP and contribute to a SIPP as mooted by the OP.

Sorry, missed that.

QrizB

aroominyork said:

My wife turns 66 in late December 2023 so can start drawing her state pension then (a max of £7246 because she moved to the UK in 2001). She is likely to be working a few years more so should she defer? The pension increases 5.8% for each year deferred and, from my calculations, if she defers she would not receive more as a lifetime total until 18 years after she begins drawing it (the green cells show).

I know nothing about your wife but if she is an entirely average 66yo then per ONS she can expect to live to 87.

Deferring her state pension for 2-3 years would probably increase her total return and would mean that, should she be one of the 50% who live longer than average, her later life is better funded.

aroominyork

I just corrected my calcs and posted a revised spreadsheet ("...if she defers for one year she would not receive more as a lifetime total until 18 years after she begins drawing, with that time period reducing by 6 months for each additional year she defers.")

zagfles

aroominyork said:

My wife turns 66 in late December 2023 so can start drawing her state pension then (a max of £7246 because she moved to the UK in 2001). She is likely to be working a few years more so should she defer? The pension increases 5.8% for each year deferred and, from my calculations, if she defers she would not receive more as a lifetime total until 18 years after she begins drawing it (the green cells show). It seems sensible to draw it immediately unless there are tax reasons otherwise such as it making you a higher rate taxpayer (which she already is, but she could reclaim the higher rate tax on earnings and state pension through SIPP contributions). Is this analysis correct?

No it's not correct. You seem to be assuming the 5.8% compounds. It doesn't.

OTOH the 5.8% simple pa applies to the current state pension, rather than the state pension at the time of deferral, which means that if eg the state pension increases faster than inflation (as it should on average if the triple lock stays in place) it'll be a bit more than 5.8% x years of deferral [of the state pension at the start of deferral]. But less than 5.8% compounded.

See these threads where we discussed it in more detail:

https://forums.moneysavingexpert.com/discussion/6258487/deferred-state-pension-then-passing-away-before-claiming-anything/p1

https://forums.moneysavingexpert.com/discussion/6315058/calculation-of-deferred-sp/p1

aroominyork

Many thanks, zagfles. So my original bottom line (before I edited my first post) was correct - you start benefiting in the 18th year after starting to draw SP... if taking inflation and increases in the SP out of the equation.

zagfles

Yes, if you ignore inflation & state pension increases you don't even need a spreadsheet to work it out, just a bit of simple algebra. If you defer state pension p for n years, then draw it for y years, you initially lose out on p*n during deferral, and when you start getting it paid it's paid at an extra p*n*0.058 a year.

So you'll break even when p*n*0.058*y = p*n

ie when 0.058y = 1, so y=1/0.058 = 17.24

If you assume the state pension increases above inflation, then it makes the number a bit lower but not much.