Defer SP and starting rate for savings: Sense check?

annaccordion · 21 July 2018 at 12:31AM

Hi All

I wasn't sure whether this is best in the 'pensions' or the Tax avoidance, so if wrong apologies in advance, but here & I am hoping for the best... and sorry about long post..

but I'm a bit confounded by the variables when considering deferring my SP.

I've been drawing SP for 18 months, now £7k pa, contracted out most of working life. It can it still be deferred?

In addition have a straight line annuity pension of £10.7k pa.

I have taxable savings income including some P2P interest of c. £10k pa.*

So - please sense check this hypothesis & tell me if anything is rubbish and maybe clear up any doubts or incorrect assumptions. Help much appreciated:) :

Deferring SP would allow me the starting rate for savings and save £1k a year in tax, £5K @20%?

However, I'd be worse off per year of SP which would be basic rate taxed so £7k x0.8 = £5.6k

So 'loss' pa = £4.6k. (£5.6k less £1k tax 'gain') clawed back in future at the enhanced rate for deferment.

My understanding is SP will be enhanced by 5.8% for each year deferred?

So assuming no rule changes and disregarding SP increases, for say, two years deferment...

2 x £4.6k = £9.2k lost, recouped at the rate of SP £7K x 5.8% x2 year deferred =£0.812k x 0.8 for tax =£ 0.65k pa

9.2k/0.65 = 14.15

= c.14 years to recoup total 'lost' SP funds? After which I stand to gain the £650 pa for the extent of my survival?

Is this all correct?

*Note: I'm adequately exposed to S&S - all sheltered in my (untouched) SIPP & S&S ISA, no other income.

Dazed_and_confused · 21 July 2018 at 3:23AM

Based on the information provided the tax you are paying on your State Pension is only £1,170 as not all of it is liable to be taxed at basic rate.

Also, when you defer the State Pension you have £1,150 of unused Personal Allowance which can be set against the savings interest so the tax on the interest (the only tax you would be paying then) will only be £570.

Or are there factors you haven't mentioned which may be relevant? There often are on these threads

soulsaver · 21 July 2018 at 11:20AM

I'm not sure if the following is affected by Dazed & Confused's first point and I don't know if all assumptions valid - someone who does will come along soon, and correct - but in simple terms:

With SP

10700+7000+10000=27700 income
less
11850 & 1000 PSA = 12850 allowances
so
27700-12850 = 14850 liable to 20% brt = 2970 tax

27700 less 2970tax =£24730 net

Whilst without SP

10700+10000 = 20700 income
less
11850 & 1000 psa & 5000 srs = 17850
so
20700 - 17850 = 2850 liable to brt = 570 as Dazed says above.

20700 less 570 tax = £20130 net

Diff to be recouped £4600
as OP said.
Assuming correct tax being paid today the only gain can be full access to the Savings Starting Rate ie 20% of £5k, and how that impacts recoup rate.

polymaff · 21 July 2018 at 2:56PM

Providing that you have no other Non-Savings Taxable Income then, from what you say, you are better off to defer - if you think that you'll survive for a fair few years. The recovery from a new state pension deferral takes about 17 years - but in the mean time the access this will give you to the £5,000 starting rate for savings will rebate you an extra £1,000 of tax for each deferred year.

Put the other way around, if you continue with the SP, despite you apparently being nowhere near being a higher rate taxpayer, the incremental rate of taxation on the SP will be about 40%

A very cruel unexpected-circumstance of G. Osborne's clever ideas.

kidmugsy · 21 July 2018 at 4:06PM

annaccordion wrote: »

I have taxable savings income including some P2P interest of c. £10k pa.*

Others have done the sums for you. I add this: deferring the pension is an attractive scheme if you then take the chance to put more of your interest-producing capital into tax shelters e.g. IFISAs, or swap interest-payers for capital-gains payers or dividend-payers. Or even swap interest-payers for Premium Bonds.

annaccordion · 21 July 2018 at 11:26PM

Dazed_and_confused wrote: »

Or are there factors you haven't mentioned which may be relevant? There often are on these threads

As I said, I have no other sources of income. I'm intrigued, what other factors are there?

kidmugsy · 22 July 2018 at 2:25PM

polymaff wrote: »

The recovery from a new state pension deferral takes about 17 years

Not so. You have no idea what the recovery period will be because you have no idea of (i) future rates of inflation, nor (ii) the alternative uses the money might be put to.

soulsaver · 22 July 2018 at 2:49PM

kidmugsy wrote: »

Not so. You have no idea what the recovery period will be because you have no idea of (i) future rates of inflation, nor (ii) the alternative uses the money might be put to.

Not sure if it's what you mean, but if the £4.6 /9.2k could be used to earn, say, 5% for the duration of the deferment then the recoup calculation is clearly significantly altered.

I'll guess though that with £10K interest on cash all the available bank 5% may already be utilised.

Still, as you say, there is scope for more lower taxed income from, for example, dividends that also has the capability to alter the calculation.

Interesting dynamic.

polymaff · 22 July 2018 at 3:14PM

kidmugsy wrote: »

Not so. You have no idea what the recovery period will be because you have no idea of (i) future rates of inflation, nor (ii) the alternative uses the money might be put to.

Irrelevant to the issue. Think about it.

jamesd · 22 July 2018 at 4:49PM

Yes, you're allowed to start deferring once after you've already claimed your state pension.

Payback time depends in part on what you'd have done with the money if you hadn't been using it to live on while deferring. For this reason John Kay has a how many years to defer calculator which takes this into account. However, deferring beyond the break-even point can be useful as longevity insurance, something you can look at by putting in a long life instead of the expected one. If you were making 5.8% plus inflation on the money you'd never break even because the lost investment gains would be the same as the increase, if both were taxed at the same effective rate.

Income tax is also a factor but the existing calculations seem to have handled that.

polymaff · 22 July 2018 at 5:29PM

jamesd wrote: »

Yes, you're allowed to start deferring once after you've already claimed your state pension.

Trying to be definitive.

You can defer the SP before drawing it, and - as james states -

You can defer the SP just once after you have begun to draw it.

So up to two deferrals.

Defer SP and starting rate for savings: Sense check?

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