Your state pension – the deferral decision
by Doug Brodie
In this blog:
/1. Your state pension – the deferral decision
/2. Our fees are 0.75% initial and 1% per annum (VAT free) – how does that compare?
/3. No portfolio income has ever fallen – how it’s done
/4. Maths & English – are you better than the 20% identified by the Economist?
/5. The Next Big Thing – you pay us to keep you away from these
/1. Your state pension – the deferral decision
You do not get your State Pension automatically - you have to claim it. You should get a letter no later than 2 months before you reach State Pension age, telling you what to do. You can either claim your State Pension or delay (defer) claiming it. If you want to defer, you do not have to do anything. Your pension will automatically be deferred until you claim it.
Deferring your State Pension could increase the payments you get when you decide to claim it.
If you reach State Pension age on or after 6 April 2016
Your State Pension will increase every week you defer, as long as you defer for at least 9 weeks. (Time spent in prison or when you or your partner get certain benefits does not count towards the 9 weeks.)
Your State Pension increases by the equivalent of 1% for every 9 weeks you defer. This works out as just under 5.8% for every 52 weeks. The extra amount is paid with your regular State Pension payment.
Example
You get £221.20 a week (£11,502 per year) (the full new State Pension).
By deferring for 52 weeks, you’ll get an extra £12.82 a week (just under 5.8% of £221.20).
Therefore 100% / 5.8% = 17.24 years to get back the income that you have given up in the year of deferral.
We don’t think that’s worthwhile. It means if you are due your pension at 67 you’ll have to be sure to live until you are 84 to be in any profit. Assuming all future Chancellors play ball…
/2. Our fees are 0.75% initial and 1% per annum (VAT free) – how does that compare?
Rathbones is a large, listed wealth and planning business with £100.7 billion in assets, 1,900 employees, a market cap value of £1.76 billion and a gross profit of £574 million. We happen to share some clients with them. They charge for investment management and for financial planning separately:
And initial planning fees:
And the ongoing fees:
St James Place has £184 billion under management via its self-employed advisers; it is not independent and only provides its own products and funds. It has a market cap value of £4.92 billion, it has 3,200 employees and 4,556 non-employed advisers. It had an ‘operating income’ of £439.6m in 2023, net income was a loss of £10m.
/3. No portfolio income has ever fallen – how it’s done.
If you want to ensure that every time you use your debit card it won’t be refused, you make sure there’s a constant balance of cash in your current account. Over time you learn how much float you need to carry in that account, and it means your expenditure payment is always straightforward and predictable. We deliver income in the same way – we make sure the investments already have the money available to pay the dividends, and that’s how you get a 100% payment increase record. Getting a 100% payment record you could do with your eyes closed – the FTSE has never failed to pay an income because that would entail all 2,300 listed companies failing to pay a dividend for exactly the same twelve-month period. Plus – here’s the thing – there is no such thing as ‘negative income’. Capital value can fall negative, income can never fall less than zero.
“Investment income can never be less than zero, it can never be negative.”
As financial planners, we’re not so much focused on your income this year, it’s more on your income in five, ten and twenty years’ time. This year’s income is already there – this is an excerpt from the accounts of Law Debenture, I have ringed the revenue reserves. You can see the last annual dividend cost was (£29.9m + £11.2m) = £41.1m and that the reserve is £47.5m – et voila! Next year’s dividend is already sitting waiting to be paid so when you buy Law Debenture, your first year’s income is already there.
Our research is based on securing the correct amount of the future income – over the last five years Law Debenture’s dividend has grown an average of 11.11% - Chancery Lane Research takes a much longer assessment of that increase and uses a blended increase figure of 3.8% growth in income per year. It’s called low-balling, and it makes client income very predictable.
/4. Maths & English – are you better than the 20% identified by the Economist?
Figure of the day: 20%, the share of adults in rich countries with maths and reading skills no better than a primary-school pupil.
- The Economist.
The OECD runs a Survey of Adult Skills once every ten years and that covers 160,000 adults in 31 ‘countries and regions’ – Slovakia needs to do a bit more reading and Chile needs to get its abacus back out.
You have £700,000 in pension and savings, roughly how much income can that generate before tax? Your state pension uses all your personal allowance, you have no other income, how much will that net monthly income be?
The ‘back of a fag packet’ number is a yield of 4%, it’s where we almost always start, so the gross income would be (£700k x 4%) = £28,000. Basic rate tax is 20% so the tax bill will be (£28,000 x 20%) = £5,600, leaving net £22,400 in your pocket.
The rule of 72 is that if you divide any number into 72, the answer is the number of years or % yield to double your money. So if you have a yield of 7.2% your money will double in 10 years (72 / 7,2), or to double your money in 8 years you need a yield of (72 / 8) = 9%. This is important for income investors to remember because we only use assets whose income grows:
“The average dividend growth across all AIC investment companies is 6.21% per year – at that rate today’s dividends double every 11½ years. “
/5. The Next Big Thing – you pay us to keep you away from these
SPACs – Special Purpose Acquisition Company: a shell company formed to raise capital to acquire an existing company. Without any doubt whatsoever SPACs were dreamed up in the US to help get private equity and VC investors out of a hole when their over-ambitious investments failed in private companies.
For example: by the time of its listing Cazoo, the second-hand car dealer, has raised around £1.4 billion from investors. (Remember, it’s a second-hand car dealer.) The rough figure though was that it lost around £400 for every car it processed so the investors tried to escape and pawn off their cost to the stock market. Investors included Fidelity, BlackRock and Morgan Stanley. It listed in New York by ‘merging’ with a SPAC set up by a venture capitalist, giving it a value of $8 billion, and went bust three years later.
It was not alone.
