iceflow

Folks,
I just want to test my logic on calculating this. The .GOV site has a booklet but just to double check.
Let's say pension is 6K GBP/annum and no cost of living increases to keep it simple. Deferral period Year 1 and Year 2

Non - Deferred Deferred
Year 1 - 6000 Nil
Year 2 - 6000 Nil
Year 3 - 6000 7286 GBP

Year 1 = 6000 increase 10.2% = 6612
Year 2 = 6612 increase 10.2% = 7826

Year 3 then is paid at 7286.

make any sense at all?

kodokan

No idea how the deferral calcs work, but your Year 2 sum is wrong or you have a typo; 6612+10.2% isn't 7826, it's 7286. Does that help?

dunroving

I think it was just a typo - the correct amount is written below that, for payment beginning Year 3.

nun

Yes this looks about right. For every year you defer your pension payment goes up by 10%. You can do this indefinitely so it's like having an annuity who's payout increases by 10% a year which is amazing. You can do the a similar thing with US social security. A common strategy for retirees is to defer these state benefits if they have funds of their own so that they have guaranteed income later in life. It also has some tax advantages too.

dunroving

There's an interesting page in my Which? Guide to Pensions - I'll look it up and post later. It essentially tells you for every week you postpone UK pension how much extra you get, and also gives you the break-even point (age beyond which you have to live in order to benefit from deferral).

iceflow

That would be good. It would all depend on how many years you deferred and what the annual cost of living increases were. I wouldn't be surprised if it would take anything from 8 to 10 years after stopping the deferment to catch up the folks who pocketed the cash from year 1. Still it sounds attractive in that 10% on the money pot is not bad when compared to the wonderful performance of the Dow and 401K's......this last year not withstanding as the Dow did ....too good...

nun

You don't defer to necessarily increase your total pension over your lifetime, but as longevity insurance and to shift guaranteed income to latter in life.

Also that 10% annual increase in payout cannot be directly compared with the returns on an equity investment as you don't have access to any underlying capital.

dunroving

The Which? Guide says the following (paraphrased):

"You can an earn an increase ... of 1 percent for every 5 weeks you defer ... this is equivalent to a 10.4 % increase for each year deferred."

- you can also defer and then take a lump sum instead of a higher pension, though it doesn't seem a particularly good deal (the effective interest paid is pretty low, maybe 2% IIRC).

In the table that shows length of deferral ... total pension given up ... etc., it gives figures for every £100/week of pension deferred. I have just given an excerpt below:

Length of deferral / Total pension given up / Extra weekly pension earned / "break even" survival past retirement age, assuming default of 65 years.

1 year / £5,200 / £10.40 / 9.6 yrs
5 years / £26,000 / £52.00 / 9.6 yrs

Considering life expectancy is about 21+ years at 65 years of age, it seems that unless you defer until you are about 80, you are more likely to be quids-in by the time you die than not, so to speak.

I note that Which? Didn't make any adjustment for inflation, etc., because the pension is increased to adjust for inflation, so the figures are in "today's money"

Pulaski

My mother deferred for 5 years, and actually worked those five years, because she enjoyed her job. As she is going to be 80 in a couple of weeks (15 years of actual retirement) she is indeed "quids in" already. As my grandmother had lived to within two weeks of her ninetieth birthday, and didn't look anywhere near as healthy as my mother did at the same age, deferring by 5 years was a fairly easy decision for my mother.

Curiously my father, who also worked 5 years past retirement, decided to draw his state pension as soon as he was able (he wasn't in a particularly well paid job, so tax wasn't much of an issue), and only lived to draw his state pension for 12 years , so had just about reached the break-even point.