Steveam wrote:Although the lower rate makes it much less attractive you are over simplifying. By deferring you are purchasing lifetime inflation proofed income. There is a risk that the government will change the rules and drop inflation proofing but it’s unlikely. Imagine that you defer for 1 year - the value of the bought inflation proofed income is very, very dependent on inflation … 0% inflation and your figure of n years may be right … inflation at 10% for a few years and n drops.
There is a very real risk of confusing real and nominal payments here.
Indeed, but are you sure n drops when taking into account the real value of the money? Methinks the way to avoid confusing real and nominal here is to treat nominal as real!
The 5.8%pa uplift
once you start drawing it is on what you'd have got
that year anyway, which includes any inflation (well, triple lock) increases. So, e.g., if you're up now for the full new state pension of £203.85pw and you start drawing it and there's 10% inflation over the next year, then next year you'll get £203.85 * 1.1 = £224.235pw. But if you defer for the year then next year you'll get £224.235 * 1.058 = £237.24, i.e. an additional £13.005 from deferring.
Yes, that £13.005 is
nominally more than the £203.85 * 0.058 = £11.82 if there'd been 0% inflation, but that £13 is worth 100/110ths less, i.e. £11.82 in real terms.
So, it doesn't matter if inflation is 0% or 10% (or any other figure), what you'll get once you start drawing it after deferring will be a
real 5.8%pa of deferral, and 100/5.8 = 17.24 years.
There is, of course, the added twist that once in payment the increased amount from deferral (the £11.82 in real terms in the example above) is only increased by CPI and not by the triple lock.