Deferring state pension

sevenhills

I know it makes, or did make sense, to defer the state pension.
"You’ll need to defer for at least 9 weeks – your State Pension will increase by 1% for every 9 weeks you put off claiming. This works out at just under 5.8% for every full year you put off claiming. After you claim, the extra amount you get because you deferred will usually increase each year in line with inflation."
I guess with rpi inflation at over 10% it is no longer advantageous to defer?
Does this 5.8% rate stay static?

pinnks

Don't forget that you no longer get the deferred period as a lump sum, so if you defer for a year you forego £10,600 for an extra £600 per year going forward.  It seems to me that there are very few instances where deferral makes sense under the new rules.

p00hsticks

The benefits of deferring the new State Pension which is paid to those reaching State Pension age after April 5th 2016 are far fewer than for those retiring under the old system - they benefitted from a higher interest rate than now, and also the possibility  of choosing a lump sum when eventually claiming rather than an increased weekly amount. 

In my personal view, it's only really worth deferring now if you intend to carry on working after retirement age and any state pension would be taxed at a higher rate now, compared to a lower rate if deferred until a later date. 

As far as I'm aware the 5.8% rate is static, and is set at a figure that is aimed to ensure that the cost to the state is actuarily neutral, with people deferring getting on average the same amount over their lifetimes as those getting a lower amount for a longer time. I think it would require a change in legislation to alter it (although happy to be proved wrong!)

pinnks

I broadly agree, though the maths is still marginal, even if you will drop you tax rate by 20%

xylophone

If still working, and under age 75, why not take the SP and contribute to a pension?

ukdw

HL best buy annuity table is showing age 65, RPI, 5 year guarantee - £4494 for £100k - so 4.5%. Not quite the same as SP one year deferral - which would be Age 66, CPI, guarantee (not sure) - 5.8%, but still a useful comparison I think. 

In simple terms (ignoring CPI rises vs lost growth/interest) the break even point would be 100/5.8 = 17.25 years, i.e, Age 83 for the first years deferral, Age 84 for the 2nd year etc.

So first couple of years probably cost neutral for those living an average lifespan, but each additional deferred year becomes less likely to fully pay back in average lifespan.

Personally I'm on the fence about whether to defer mine/partners for 2-3 years each.  Will probably depend a fair bit on how DC pension growth goes over the next 5-6 years for us, health and tax situation and whether I think the DC can still handle the continued additional £10k drawdown PA that each one year SP deferral would require.

MarzipanCrumble

From a totally ignorant financial viewpoint but an emotional one, if you are still working after pension age and have enough from that work income, BUT are emotionally stressed that you may not have enough income when you retire - then defer.

I did this (admittedly under old pension scheme), and now have a margin of SP income + DB pension that really means I don't have to worry or stress out about income now retired.   Yes, I could have taken the SP at age I was entitled but the interest rate was way above what I could have invested and made (and I know that this isn't the case now but 5.4% is guaranteed).

I have peace of mind that I am buffered - yes know I am lucky but what I am saying that it is not all about calculating how long you will live to make a 'gain' it is about feeling safe too.

dealyboy

Looking at it simply as deferment on new state pension, the case has been put many times in the past few years ... here, there and everywhere.

It is deliberately cost neutral for the government and is calculated as 1/9% of the person's current SP entitlement per week of deferment at the date of claim. It is referred to as 'extra state pension' and is paid with the state pension. It increases by CPI (not the triple lock).

It has been calculated that 17 years of state pension is the break even point, but the longer the deferment the older the person is at the break even point, so at 84 after 1 year but 88 after 5 years.

Is it worth it? ... of course it depends on the individual circumstances. It has been likened to an insurance policy or deposit paying 5.8% annual interest, for the period of deferment, on a future state pension amount which has increased by the triple lock in the meantime.

A few quirks have entered the argument in recent years:
- freezing of personal tax allowances means the extra state pension is likely to creep into taxable income at a certain point under current rules.
- deferring during the state pension qualification tax year may avoid paying tax on the SP in that year, especially if there are earnings in that year ... subsequently judicious taking of taxable income may avoid income tax.
- Claiming after deferral, SIPP investment is less lucrative, again due to the freezing of the thresholds ... i.e. paying in £2,880 and drawing down £3,600 is likely to incur tax.

I reached state pension age in 2000 2020 and deferred for 45 weeks and have paid no tax on the SP and extra SP, I otherwise would have paid about £1,200 tax on the state pension. My SP is £203.85 per week and extra SP is £10.19 per week. I am 68.

Steve_666_

Been looking at this for a while, first I compared deferment verses saving into a SIPP and buying an annuity. Deferment wins. There are a nbr of variables that you cant control, how long you will live, the CPI over the period etc etc. I have decided to take the SP and  put all of it into my SIPP, investing monthly into one of the dividend heros paying > 5% with modest growth. The thought is that the dividend and gradual capital sum withdrawal will out perform deferment.Inflation and the CPI could prove that to be wrong.

Steeplechasing

On deferment in general I believe the guidance on pension deferral on the gov.uk page is far from satisfactory. One of the dictionary definitions of defer is to 'carry-over'. The talk of 'extra' pension and examples of how you can benefit from deferring could lead some to conclude that deferring the pension is to save it up and earn good interest on it. It should be made ultra clear that to defer a pension is to lose it for the full period of deferment. 

nigelbb

Just a reminder that it is possible to defer the state pension even after you start drawing the pension but you can only do this once.