Should I defer taking my state pension until after financial year 2024 ends?

HUMBUG

This is my situation for this financial year 24/25
1. My employee Pension income= £11600 pa
2. I can claim my State Pension on the 1st Oct 24  so income for 24/25 = £5600
3. Other savings interest income = £11000

So I'm assuming my total income for this financial year  = £ (11600+5600+11000) = £28200
My personal allowance = £12570
Starting Savings Rate = £18570 - 11600-5600 = £1370
Personal Savings Allowance = £1000
Taxable Income at 20%=  £(28200 -12570-1370- 1000) =£13260
Tax at 20% = £13260 X 20% = £2652

But say I deferred my State Pension until after 5th April 25. 

My total income for his financial year = £(11600+11000) = £22600
Starting Rate Savings Rate = £5000
Personal Savings Allowance = £1000
Taxable Income at 20%=  £(22600 -12570-5000-1000) = £4030
Tax at 20% = £4030 X 20% = £806

My income tax will be reduced by  £(2652-806) = £1846

But I will have forfeited net state pension income for this financial year =  £(5600 -(12570-11600)) *80% = £3704 . 

This still leaves me with less income this financial year = £(3704- 1846) = £1858

But deferral of state pension for 6  months works out at an increase of about 5.2% per year.  

Therefore for year 25/26  my pension will increase  by £11200 x 5.2% = 582.4 pa. 

For me to make up that loss of £1858 less income I would have to live for £1858/582 =3.2  yrs approx.

If I live for another 13.2  years my extra pension income would increase by  10 x 582 =£5820

It does seem that I might be better off deferring my state pension for 6  months but not 100% sure my calculations above are correct. Would welcome anyone else's comments as I struggle with HMRC tax rules.

Dazed_and_C0nfused

But deferral of state pension for 6 months works out at an increase of about 5.2% per year.  

Therefore for year 25/26 my pension will increase by £11200 x 5.2% = 582.4 pa. 

Bit confused by this. 

It's actually 5.8% but if you are deferring for 6 months wouldn't your increase be more like 2.9%?  So an extra ~£325 rather than £582.40.

https://www.gov.uk/deferring-state-pension/what-you-get

EthicsGradient

I think there's a small mistake in your first paragraph of calculations - the starting savings rate is not calculated from the £5000 plus the £1000, just the £5000; the £1000 comes in next, but you had effectively put it in twice. So it should be:

So I'm assuming my total income for this financial year  = £ (11600+5600+11000) = £28200
My personal allowance = £12570
Starting Savings Rate = £17570 - 11600-5600 = £1370 £370
Personal Savings Allowance = £1000
Taxable Income at 20%=  £(28200 -12570-1370-370- 1000) =£14260
Tax at 20% = £14260 X 20% = £2852

The paragraph for what you get if you don't take the state pension seems OK to me; I'd then say:
With state pension: gross income=28200, tax=2852, net income= £25,348
Without state pension: gross income=22600, tax=806, net income=£21,794
This leaves you with less income this financial year =£3,554

pafpcg

HUMBUG said:

Therefore for year 25/26  my pension will increase  by £11200 x 5.2% = £582.4 pa. 

For me to make up that loss of £1858 less income I would have to live for £1858/582 =3.2  yrs approx.

If I live for another 13.2  years my extra pension income would increase by  10 x 582 =£5820

It does seem that I might be better off deferring my state pension for 6  months but not 100% sure my calculations above are correct.

Your "£582.4pa" from the increased pension is before tax so your calculation of the time required to balance the initial loss against deferment gain is extended even further.

If your baseline income (employment pension+savings interest) is above the tax-paying threshold, then surely the calculation is simply a comparison between the state-retirement-pension paid immediately and the state-retirement-pension+deferment paid at some point in the future? You'd be paying basic-rate tax on either option.  With a deferment boost of 5.8% for every year of deferment, you'll need to survive at least 17 years before you reach the break-even point.  From what I can remember of the documentation, based on actuarial calculations, which reviewed the deferment choices for retirees when I made my choice, there was little point in males deferring with the rules for the New pension post-2016 deferral rates (5.8%) and only a minor gain for females.  (For pre-2016 pension deferral rates at 10%pa, deferral was much more attractive with a break-even point at 10 years and suggesting an optimal deferment of around 3 years for males and 9 years for females.)  

You also need to factor-in the income gain you might have made by investing the pension income you would have received during the deferral period: in the example you've quoted, the capital you could have invested in the six months would be pre-tax £5600 which if invested at 5% would give an income of £280pa before tax.

PS:  You'd get more comprehensive responses if you post your query on the MSE Pensions forum.

EthicsGradient

I think, working Dazed_and_C0nfused's and pafpcg's comments into the calculation, it continues:

"But deferral of state pension for about 6 months works out at an increase of 3% per year (27 weeks from 1 Oct to new tax year, 1% increase per 9 weeks)

Therefore for year 25/26  my gross state pension will increase  by £11200 x 3% = 336 pa; which will all be taxed at 20%, so net increase = 0.8*336 = £268.80 (you might add on 2.5% for the minimum "triple lock" increase by the new tax year, so £275.52).

For me to make up that loss of £3553 less income I would have to live for £3554/275.52 =12.9 yrs approx."

xylophone

Other savings interest income = £11000

Outside ISA?

https://www.gov.uk/apply-tax-free-interest-on-savings

You need to register for Self Assessment if your income from savings and investments is over £10,000. Check if you need to send a tax return if you’re not sure.

pafpcg

EthicsGradient said:

I think, working Dazed_and_C0nfused's and pafpcg's comments into the calculation, it continues:

"But deferral of state pension for about 6 months works out at an increase of 3% per year (27 weeks from 1 Oct to new tax year, 1% increase per 9 weeks)

Therefore for year 25/26  my gross state pension will increase  by £11200 x 3% = 336 pa; which will all be taxed at 20%, so net increase = 0.8*336 = £268.80 (you might add on 2.5% for the minimum "triple lock" increase by the new tax year, so £275.52).

For me to make up that loss of £3553 less income I would have to live for £3554/275.52 =12.9 yrs approx."

Good reminder! - always end the deferment a couple of weeks into the next tax year to have the deferment increment automatically increased by that year's Triple Lock.  But note that in future years, DWP increase the deferment increment only by CPI (not the Triple Lock rate).

"For me to make up that loss of £3554 less income I would have to live for £3554/275.52 =12.9 yrs approx."

Assuming that Humbug can manage without the State Pension for six months, then that £3554 income, if the pension is NOT deferred, can be invested in April 2025 in a long-term investment.  That invested £3554 could generate an annual income which offsets the "value" of deferment.  At 3%, that's £106.62pa (£85.30 after tax) so the break-even calculation becomes:

£3554/(275.52-85.30) = 18.7 years!

zagfles

pafpcg said:

HUMBUG said:

Therefore for year 25/26  my pension will increase  by £11200 x 5.2% = £582.4 pa. 

For me to make up that loss of £1858 less income I would have to live for £1858/582 =3.2  yrs approx.

If I live for another 13.2  years my extra pension income would increase by  10 x 582 =£5820

It does seem that I might be better off deferring my state pension for 6  months but not 100% sure my calculations above are correct.

Your "£582.4pa" from the increased pension is before tax so your calculation of the time required to balance the initial loss against deferment gain is extended even further.

If your baseline income (employment pension+savings interest) is above the tax-paying threshold, then surely the calculation is simply a comparison between the state-retirement-pension paid immediately and the state-retirement-pension+deferment paid at some point in the future? You'd be paying basic-rate tax on either option.  With a deferment boost of 5.8% for every year of deferment, you'll need to survive at least 17 years before you reach the break-even point.  From what I can remember of the documentation, based on actuarial calculations, which reviewed the deferment choices for retirees when I made my choice, there was little point in males deferring with the rules for the New pension post-2016 deferral rates (5.8%) and only a minor gain for females.  (For pre-2016 pension deferral rates at 10%pa, deferral was much more attractive with a break-even point at 10 years and suggesting an optimal deferment of around 3 years for males and 9 years for females.)  

You also need to factor-in the income gain you might have made by investing the pension income you would have received during the deferral period: in the example you've quoted, the capital you could have invested in the six months would be pre-tax £5600 which if invested at 5% would give an income of £280pa before tax.

PS:  You'd get more comprehensive responses if you post your query on the MSE Pensions forum.

No, because taking the state pension means as well as paying basic rate tax on the extra income, you push most of the savings income out of the 0% starting rate, effectively paying 40% tax on some of it (20% on the extra income and 20% on the savings income now pushed out of the starting rate). 
 

slinger2

Isn't the principle here about getting an extra year of the £5,000 allowance. This gives you a maximum of an extra £1,000 for a 20% taxpayer.

Normally the break-even point comes at 900/52.25 weeks = 17 years. But in this case the £1,000 saved reduces this by 1000/250 = 4 years, bringing the break-even point to 13 years.

HappyHarry

Perhaps drawing the state pension in October and putting the proceeds in a personal pension to benefit from the tax relief would make drawing it now seem more attractive?

zagfles

HappyHarry said:

Perhaps drawing the state pension in October and putting the proceeds in a personal pension to benefit from the tax relief would make drawing it now seem more attractive?

OP could only put £2880 (£3600 gross) into a pension as he/she has no earned income.