Deferring State Pension

[Kantwebefriends]

I'd be interested to know when and how you managed to defer your in payment state pension. I've found it to be impossible.

I did it in (about) 2015. My wife did it too. For the old-style state pension the rules that let you do it were quite explicit.

[CliffEdge]

I'd be interested to know when and how you managed to defer your in payment state pension. I've found it to be impossible.

I did it in (about) 2015. My wife did it too. For the old-style state pension the rules that let you do it were quite explicit.

Ah thanks. Unfortunately everything seems to have gone to ruin since then.

[HillManMill]

Thanks everyone for your replies. They helped me to think a little more about this.

The John Kay calculator is certainly useful but you really do need to think about your objectives and your circumstances and your risk tolerance (in the future) ............

....... longevity (if you can think of deferral you’re probably of a group likely to live beyond the average).

..... are you worried that inflation could stay elevated (perhaps 8-10%) for many years? Do you believe you can make positive real returns in all circumstances? (Inflation proofed bonds might help). Deferring offers likely inflation proofed income (but do you trust the government …)

I’m fairly comfortable and see the deferral as a way of purchasing an index linked annuity which I might never need but which covers off certain tail risks.

Well to respond

I took a look at the John Kay Calculator this would indicate that deferral is worth considering. But only for a year or two. So I am tinkering around the edges really.

If I am to defer then the income from the state pension in the deferred years is replaced by income or capital withdrawal from investments [SIPP or ISA]. So the choice is either:
Take pension earliest possible date and continue to accept investment risk on my SIPP and ISAs
or
Reduce my investment risk by taking income from my investments and exchange that for the increase from a deferred state pension.

In narrow financial terms this would seem to come down to my being able to achieve a long term average return in excess of the 5.6%

I rather like the idea of adding to my 'indexed' income all be it rather modestly.

[Kantwebefriends]

Thanks everyone for your replies. They helped me to think a little more about this.

I rather like the idea of adding to my 'indexed' income all be it rather modestly.

We too valued extra state pension as a diversifier and, in particular, an index-linked diversifier. Not least because we draw our principal occupational pensions from the same scheme and its finances don't seem altogether sound.

[vand]

like I said, its a crappy deal (new SP rules)

https://youtu.be/NZ46g0UlvOU

[scrumpyjack]

I deferred mine for 5 years at the 10.4% rate. The decision was not based on a view of what would lead to the highest total return in my lifetime but rather to increase the guaranteed inflation protected element of my income in later life. ie de-risking retirement income a little.

At 10.4% it was well worth it. Not sure it is worth it now!

[Steveam]

I deferred mine for 5 years at the 10.4% rate. The decision was not based on a view of what would lead to the highest total return in my lifetime but rather to increase the guaranteed inflation protected element of my income in later life. ie de-risking retirement income a little.

At 10.4% it was well worth it. Not sure it is worth it now!

I did similarly deferring for 6 years at the 10.4% rate. I also bought extra state pension when that was possible. I had relatively little inflation proofed retirement income and lived through a period of high inflation and saw what this did to some retirees. Like Scrumpyjack this was about derisking rather than maximising. I now receive nearly £18,000 a year state pension (4 weekly amount x 13) which is inflation protected - a nice backstop.

Best wishes,

Steve

[Kantwebefriends]

The tail end risk in deferring which nobody seems to appreciate is the risk that you defer and then unexpectedly die before you even collect a penny. That is a far worse outcome ....

That's a weak argument because you could make it against any annuity however much it pays out annually. It's really only a bad outcome if you've left a widow or other dependants. If you haven't, well you're dead so you don't care. The real argument against deferral is that the current terms are unappealing. (They used to be ridiculously generous to the pensioner and therefore extravagant for the taxpayers stumping up for them. Now they ain't. But even when they were generous you'd get people with a phobia about annuities ranting against deferral.)

One test for our poster: how large a commercial index-linked annuity could you buy for (say) the capital that five or ten years worth of State Retirement Pension would bring you? Might it be best to buy such an annuity, with widow's benefit if required, and replace the capital that you've spent by drawing your State Retirement Pension rather than deferring it?

If you've bought the proposed annuity with capital in your Personal Pension, might the State Retirement Pension let you fund Personal Pension contributions (e.g.£3,600 gross) for you, or you and your wife/dependants?

[AshleyW]

Unless there are tax reasons to defer it doesn’t seem financially worthwhile as it takes about 20 years to break even on total income received with one year deferment.

[Steveam]

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.

Although I like the John Kay calculator I think an easier way to think of this is as insuring against high inflation by buying an index linked enhancement. For me, this is peace of mind regardless of my longevity.

Best wishes,

Steve

[mc2fool]

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.

[Steveam]

mc2fool: You are, of course, correct which is why I highlighted the issue.

But all your non-inflation protected income is declining relative to this inflation protected income. 0% inflation is a relative difference of zero. High inflation gives a high relative difference.

Best wishes,

Steve