Defer state pension?

Silvertabby

We thought about deferral but, as we were/are both basic rate taxpayers before and after SPA decided not to.  Going to enjoy spending it instead.

However, I did take advantage of the even better scheme - I bought  an extra £1K per year of index linked State pension for just £3K.

garyelder

I had advice on this a few years ago and it was take it straight away which I will do 

eskbanker

garyelder said:

I had advice on this a few years ago and it was take it straight away which I will do 

But presumably that advice related specifically to your own circumstances at the time, and those foreseen for your SPA, so can't be assumed to be applicable to others, with potentially different tax status, other pension income, savings, investments, other assets, health, family, etc, etc?

Secret2ndAccount

I think you’re looking at it the wrong way. I like your spreadsheet, and zagfles’ calculation, but they both tell you the same thing: it’s a score draw. There’s no option that’s so good you should obviously take it. There is no option which is so bad that you should avoid it. Unless she has inside knowledge of her life expectancy, you can’t say which option yields 50p more.

The question is, what do you want to do with your lives? Some people want to go around the world before they are too old, then they will be content to sit in a rocking chair at 80. Others don’t have any grand plans, but want to be sure they can pay for a cleaner, a gardener, and the best care home in later life. So, do you want a SIPP which you can access flexibly at any time, with the chance to pull out a lump sum? Or do you want the comfort of an index-linked long term guaranteed bit extra?

The most profitable option, right now, is to pay as much as possible into the company pension, or a SIPP, to maximise the tax relief. There are bigger gains to be made there than than deferring the SP.

NedS

Secret2ndAccount said:

I think you’re looking at it the wrong way. I like your spreadsheet, and zagfles’ calculation, but they both tell you the same thing: it’s a score draw. There’s no option that’s so good you should obviously take it. There is no option which is so bad that you should avoid it. Unless she has inside knowledge of her life expectancy, you can’t say which option yields 50p more.

The question is, what do you want to do with your lives? Some people want to go around the world before they are too old, then they will be content to sit in a rocking chair at 80. Others don’t have any grand plans, but want to be sure they can pay for a cleaner, a gardener, and the best care home in later life. So, do you want a SIPP which you can access flexibly at any time, with the chance to pull out a lump sum? Or do you want the comfort of an index-linked long term guaranteed bit extra?

The most profitable option, right now, is to pay as much as possible into the company pension, or a SIPP, to maximise the tax relief. There are bigger gains to be made there than than deferring the SP.

I agree. The calculations are designed to be cost neutral to the state for the average person - not to be good or bad value.

It boils down to do you want secure guaranteed income (in which case defer) or would you prefer to be exposed to investment risk albeit with added flexibility and the potential of something left to leave to beneficiaries.

The other issue to consider is the partner (you!). By deferring their state pension, the partner loses out upon early death (assuming you consider finances jointly), which may or may not be important to you. It may be desirable for both partners to defer equally, or for one partner to defer to allow a re-balancing of guaranteed income where one partner has significantly better pension provision than the other.

zagfles

NedS said:

Secret2ndAccount said:

I think you’re looking at it the wrong way. I like your spreadsheet, and zagfles’ calculation, but they both tell you the same thing: it’s a score draw. There’s no option that’s so good you should obviously take it. There is no option which is so bad that you should avoid it. Unless she has inside knowledge of her life expectancy, you can’t say which option yields 50p more.

The question is, what do you want to do with your lives? Some people want to go around the world before they are too old, then they will be content to sit in a rocking chair at 80. Others don’t have any grand plans, but want to be sure they can pay for a cleaner, a gardener, and the best care home in later life. So, do you want a SIPP which you can access flexibly at any time, with the chance to pull out a lump sum? Or do you want the comfort of an index-linked long term guaranteed bit extra?

The most profitable option, right now, is to pay as much as possible into the company pension, or a SIPP, to maximise the tax relief. There are bigger gains to be made there than than deferring the SP.

I agree. The calculations are designed to be cost neutral to the state for the average person - not to be good or bad value.

It boils down to do you want secure guaranteed income (in which case defer) or would you prefer to be exposed to investment risk albeit with added flexibility and the potential of something left to leave to beneficiaries.

The other issue to consider is the partner (you!). By deferring their state pension, the partner loses out upon early death (assuming you consider finances jointly), which may or may not be important to you. It may be desirable for both partners to defer equally, or for one partner to defer to allow a re-balancing of guaranteed income where one partner has significantly better pension provision than the other.

They aren't designed to be cost neutral, if they were the deferral reward would increase every year, like annuity rates, instead of effectively reducing due to lack of compounding.

But yes you need to consider other issues than just attempting to maximise lifetime income. For instance if you have DB and DC pensions and the DB plus state pension is a bit less than you want to live on, you could defer to increase your DB+SP to what you need, and so be able to spend all your DC rather than trying to make it last till you die.

nigelbb

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.

This is what I have done.

nigelbb

It's worth remembering that if you choose to take the state pension without deferment it is possible at a later date to defer once.

aroominyork

Am I right in thinking that to do this as a higher rate taxpayer, for each £1000 gross SP received, you pay £800 net into SIPP?

Dazed_and_C0nfused

aroominyork said:

Am I right in thinking that to do this as a higher rate taxpayer, for each £1000 gross SP received, you pay £800 net into SIPP?

If you pay a qualifying contribution of £800 the pension company will add £200 in basic rate tax relief, courtesy of HMRC, and you have a gross pension contribution of £1,000.

That gross contributions means your basic rate band is increased by £1,000 meaning you can pay more 20% tax and less 40%.  The amount of personal tax saving depends on your overall tax position for the tax year the contribution is paid in.

Don't forget that a higher rate payer will receive the £1,000 in State Pension gross but their other PAYE income will have £400 extra tax deducted as a result of getting the £1.000 gross so only £600 will actually be received when looking across the whole picture.