Deferring the state pension

[Clitheroekid]

I recently received a letter saying that I'm entitled to claim my retirement pension later this year. However, I'm aware that deferring it will produce a larger pension.

I can't make up my mind whether or not to do so. I am (so far as I'm aware) in fairly good health, so that justification for taking it now doesn't exist. And although I don't really need the additional income neither am I likely to need it in the future.

Even so, although it's not likely to make much practical difference either way I'd still like to make a decision that's made on rational grounds, so far as possible.

I understand that by deferring it for a year I'll get a pension that's 5.4% higher, which is, on the face of it, a good return. While the figure is significantly less than the overall return I would normally expect on my investments (including both income and capital gains) I'm well aware that it's not a like for like figure, but I can't work out how to make a proper comparison.

I'd therefore be grateful for any thoughts, and more particularly I'd be interested to know what decision fellow Fools have actually made - or are intending to make - and why.

[scrumpyjack]

I did this 7 years ago but the incentive was twice that available now. There is obviously a cross over point depending on how long you expect to live. Your pension is increased by deferring it but you get it for fewer years.

I deferred it for 6 years and then claimed a pension about 60% higher than it would have been.

There are other factors to consider.

One can view the state pension as a rock solid guaranteed inflation proof income that you get as long as you live. I felt that was worth a lot in comfort terms on top of the relatively simple financial comparison and so worth deferring for longer.

Secondly a pension is IMO politically safer than investment returns, in the event a government hostile to capitalism takes power. This is a real risk now.

But the 5.4% uplift now is so low I'm not sure I would bother if I were faced with the decision now!

[kiloran]

I had a similar situation. I assumed that the powers-that-be were unlikely to pay me more money overall for a deferred pension (based on typical life expectancy) than if I took the pension as soon as it was available. And if I pop my clogs early, the money would be lost.
So, although I don't need the money, I'd rather have it now and do what I want with it (invest it) rather than risk losing.

A bird in the hand.....

--kiloran

[AsleepInYorkshire]

If I was in your position I'd be tempted to take the pension immediately and invest it in a private pension (assuming you're not maxed out in this area - I think it's 40K pa). Potentially this money will pass to your heirs and although they will pay tax on that it will only be at their tax rate and when they "draw down on it".

AiYn'U

[Kantwebefriends]

5.8%, I think.

This calculator might help: https://www.johnkay.com/pension/

The case for deferring isn't strong unless unless (i) it lets you avoid some income tax, or (ii) you feel short of inflation-protected income. Or:-

I wonder whether anyone might incline to defer the state pension while inflation stays low and stock markets thrive with the intention of drawing the pension if the inflation rate increases or if shares start to do badly. That might allow one to avoid selling shares while markets are low, or to avoid buying shares with high dividends that one would not otherwise incline to buy.

I suppose some couples might think that drawing the pension might make it more comfortable to gift the IHT-exempt annual £6k to children or grandchildren. They might also think that the state pension would make it more affordable to draw less currently from (say) SIPPs, with potential long-term advantages in terms of (i) future payments to the widow or (ii) IHT.

[Lootman]

I understand that by deferring it for a year I'll get a pension that's 5.4% higher, which is, on the face of it, a good return.

Except it is not really a return. It's not like investing £1,000 and getting £1,054 back a year later. Rather you forgo cashflows coming in for a year and then get 5.4% more.

The way I look at things like this is to work out the age where I would break even. In other words if you defer for one year, then when will the sum total of the extra cashflows make up for the loss of the first year's cashflows?

Let's say you pension is worth £1,000 a month if taken immediately. If you defer then you lose £12,000 in cashflows for the first year, but then get £1,054 per month starting in year two (plus any general uplifts). How many months does it take an extra £54 to make up that lost £12,000?

The way I compute this, a 10% deferral increase takes 10 years to catch up. A 8% uplift takes 12.5 years. A 6% uplift takes 16.66 years to catch up. On that basis a 5.4% uplift from waiting isn't worth it. And that doesn't even take into account the returns you will get by investing those cashflows earlier.

There are also taxes to consider. If you are a high-rate taxpayer but won't be in a few year's time, then that might be an argument for deferring.

But it's really a bet on how long you will live. So, do you feel lucky, punk?

[Lanark]

Life Expectancy for men at 67 is currently 83.87 years or 16.87 years of retirement.

By forgoing 1 year of pension you are on average losing 1/16.87 of the potential pension payouts which is 5.9%

So if the uplift is less than 5.9% it is not worth doing unless tax differences will make it worth taking the money later.

If you are planning to keep working after retirement age, be aware that that is strongly correlated with an earlier death so maybe think again about an earlier retirement date.
If you have passive income which causes you to pay tax, theres a good chance that will continue (or even increase if interest rates increase) into the future, in which case just take the money.

[Steveam]

This is very complicated. I think people often overlook the value of inflation proofed income - perhaps I’m fighting yesterday’s battles but I remember inflation hitting 20%+. How much would it cost to buy a triple locked pension? If you take the state pension now are you going to be taxed at, say, 40% because you’re still earning whereas you might be lower taxed in a few years time. I passed state retirement age when deferral gets 10% so the calculation for me is different but here are a few considerations:

- what are your longevity expectations?
- do you need the money now?
- what are your tax rate expectations, short term, medium term, long term?
- in the context of other income how valuable is an index linked (triple lock) pension?
- dependants/beneficiaries?

If you search the internet: pension deferral John Kay you will see that professor Kay has written on this and provides a calculator.

My take is that it’s not all about money and some consideration should be given to your overall inflation proofed income security and diversification.

Best wishes,

Steve

[Dod101]

I think that I agree with Steveam. I took my State Pension when it was available and opened a separate savings account for it. It is my travel fund. Wonderful to have money that you do not need to find for travel and what is more, it is topped up every four weeks. Take it now and enjoy!

Dod

[Steveam]

I should have added this link:

https://www.johnkay.com/pension/

Best wishes,

Steve

[fca2019]

Long way off for me I'd take when becomes available. I think only certain circumstances would make sense to defer such as extra income would push you into higher rate band.

[richfool]

I was living overseas when I reached UK state pension age, and wouldn't have received the cost of living increases, so deferred taking my state pension for 1 year. The uprating was at that time was 10.4% pa. Then upon returning to the UK I deferred again for a second period. I liked the idea that I would get the cost of living increases (triple lock for the time being) on the uprated amount.

Since then I have been ploughing a fair proportion of the enhanced pension I receive into my ISA.

[scrumpyjack]

Also don't forget that you have the option, when you stop deferring, to take the deferred amount as cash rather than increased pension.

This may be advantageous if you are a higher or additional rate taxpayer now ( or if taking the pension would push you into the effective 60% rate from losing the personal allowance) but will have a lower tax rate later on when you stop deferral. The lump sum is then taxed at your then marginal rate. It isn't added to your income but simply taxed on your highest rate.

[ursaminortaur]

Also don't forget that you have the option, when you stop deferring, to take the deferred amount as cash rather than increased pension.

This may be advantageous if you are a higher or additional rate taxpayer now ( or if taking the pension would push you into the effective 60% rate from losing the personal allowance) but will have a lower tax rate later on when you stop deferral. The lump sum is then taxed at your then marginal rate. It isn't added to your income but simply taxed on your highest rate.

Taking the deferred state pension as a lump sum is no longer possible

https://www.thisismoney.co.uk/money/pensions/article-7399265/My-husband-deferred-state-pension-refused-lump-sum.html

Steve Webb replies: There was a major change to the state pension system on 6 April 2016 and part of that reform related to the rules around deferring your state pension.

Your husband reached state pension age just a few days into the new regime and so the new rules apply to him.
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Under the old rules, you had two options if you chose to defer.

One option was to roll up all of the deferred payments as a lump sum (plus interest) which you are planning to do.

The other option was to take an enhanced state pension, with an extra 10.4 per cent on the pension for each year of deferral.

This additional rate was very attractive and means that most people will more than make up in retirement what they gave up by deferring.

What are the new rules that affect your husband?

For those, such as your husband, who reached pension age under the new system, the option of a deferral lump sum has been abolished.

The only option now is to take an enhanced pension when it finally comes into payment. The rate of enhancement is now an extra 5.8 per cent for each year of deferral.

[scrumpyjack]

Oh thanks for that. My wife did this a couple of years ago. Clearly no longer possible!

[Clitheroekid]

Thanks for all the excellent advice. I've decided to follow Dod101's example, take the money, and put into a separate pot for travel.

Unfortunately, although I don't, so far as I know, have any serious illnesses, both my parents died fairly young and I think my life expectancy may be shorter than average. But I think it was the realisation of how long it would take to make up the shortfall that finally convinced me.

So it's time to start checking winter break destinations!