Missing inflation on advice wrt deferred state pension page

m_tim_c

The page  on the trade offs for deferring state pension (which I cannot embed a link to) notes that deferring the state pension by a year takes ~20 years to get to break even. That's true, if inflation is at 0%. Even at 2% the breakeven for npv goes out to 29+ years. So, for  a typical male of 66, you've got ~1 in 10 chance of getting to break even, rather than just under 1 in 2.

I realise that this doesn't impact the point about tax, but it does strike me as a material detail, especially since we're unlikely to get down to 2% inflation for some time. At current rates, I could well believe that it changes the relative importance of the possible tax benefits.

dealyboy

edit: forgive me Tim ... Welcome to the forum ... and thank you for your poser ...   

https://www.moneysavingexpert.com/savings/should-i-defer-my-state-pension/#benefits

The article states 20 years but its generally accepted to be 17 years to the break even point and is cost neutral, comparing the SP given up to the cumulative 'extra state pension' (paid with the SP) gained at that point, which is also around the average life expectancy.

The extra state pension starts at the percentage accumulated of the SP rate at the time of the claim increasing in April by the annual CPI inflation rate each year (previous September rate), so 100/5.8 per year gives 17.24 years from the start of deferral.

Steve_666_

decided to take mine and increase my investments in my SIPP by a similar amount. Looking to buy investment trusts that pay > 5%

Silvertabby

Thought about this, but decided against it due to the poor (in comparison with pre 2016s higher rate of 10%) rate.

However, I grabbed the opportunity to top up my pension to the full nSP rate by buying voluntary class 3s with both hands.  Yes, I pay 20% tax on this, but with a break even rate of less than 4 years it's still exceptional value. 

QrizB

m_tim_c said:

The page  on the trade offs for deferring state pension (which I cannot embed a link to) notes that deferring the state pension by a year takes ~20 years to get to break even. That's true, if inflation is at 0%. Even at 2% the breakeven for npv goes out to 29+ years. So, for  a typical male of 66, you've got ~1 in 10 chance of getting to break even, rather than just under 1 in 2.

The state pension is triple locked, and additional state pension increases with uncapped CPI. At least in principle, the inflation rate is not relevant here.

In the words of secondary school maths teachers, please "show your workings".

hugheskevi

m_tim_c said:

The page  on the trade offs for deferring state pension (which I cannot embed a link to) notes that deferring the state pension by a year takes ~20 years to get to break even. That's true, if inflation is at 0%. Even at 2% the breakeven for npv goes out to 29+ years. So, for  a typical male of 66, you've got ~1 in 10 chance of getting to break even, rather than just under 1 in 2.

I realise that this doesn't impact the point about tax, but it does strike me as a material detail, especially since we're unlikely to get down to 2% inflation for some time. At current rates, I could well believe that it changes the relative importance of the possible tax benefits.

Taking a State Pension age of 67 and a full new State Pension of £203.85 and ignoring any investment returns (ie, just looking in pure cumulative cash terms), then for 1 year of deferral the break-even point is age 82 if inflation is 2%. The triple-lock increase figure doesn't matter, as the standard State Pension is the same in both the standard and alternative case in all except the first year, and it is only the deferral increments that change and these are based on CPI uprating.

The least favourable assumption for this comparison would be inflation of 0%, in which case the breakeven point is age 85 - which is male life expectancy for someone currently aged 67. Higher inflation assumptions reduce the break-even point (although that is partly due to the use of cumulative cash to make the comparison).

What discount rate are you assuming for npv calculations?

Deferral is neither a great nor terrible deal - it is more likely that individual preferences around having immediate money available compared to having a guaranteed index linked income for life will determine the decision. For someone with a fully indexed decent DB pension it probably won't be very attractive, but for someone reliant on only DC pension with no other guaranteed income it would probably be more attractive.