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Govt confirms cut in state pension delay incentive

Pensions minister Steve Webb has confirmed the amount of extra state pension people receive when they defer retirement will be cut by almost half.

Currently, the Government incentivises people to delay taking their state pension by increasing the payment by around 10 per cent a year for each year after state pension age.

This morning, in a written ministerial statement, Webb said the increase will be cut to 5.8 per cent a year from 6 April 2016.

It says: “Following careful consideration of the information provided, the proposed new rate wil be one ninth of 1 per cent for each week the state pension is not claimed. This means a 1 per cent increase for every nine weeks of deferral or around a 5.8 per cent increase for each full year.”

Legislation for the change will be published later this year.

Setting out the plan last July, Webb said there was little evidence the incentive encourages people to work longer.

He said he expects the move to save the Government £200m a year in 2020 and £300m a year in 2030.

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Nick Pilkington 22nd July 2014 at 1:07 pm

    This will backfire on Steve Webb.
    At 10.4% there is a strong incentive to defer taking the state pension meaning the government does not have to fund current payments.
    At 5.8% you may as well claim it so the government will have to fund current payments.
    It may not encourage people to work longer but it does encourage people to delay taking the pension.
    No logical thought process by Steve Webb.

  2. What a bunch! I have always advised my clients to defer and indeed did so myself (as did my wife). We have both built up a considerable advantage.

    I can certainly agree with Nick P that if the incentive were only 5.8% I would not have deferred, but would have taken the pension at the earliest possible opportunity.

    Knowing this scummy lot I have (and advised clients likewise) to take the PCLS before they reduce or scrap that too.

  3. I would have thought the government was benefitting from a variation of mortality drag, as a proportion of people who defer their pension will never collect it. Government saving or not is the balance between those that do receive a deferred pension will receive a higher amont for a shorter term. I wonder if it will save anything in the longer term? how did they get to £200m a year.
    I thought it was generally good advice to defer if you could, not necessarily to do with carrrying on working but if you had sufficient money to manage without the state pension and an option of more relative value to those of modest means.

  4. The 5.8% will be based on calculations by the Govt Actuaries Dept. The ‘fair’ enhancement based on average mortality is probably somewhere between 5.8% and 10.4%. The cost-neutral % will depend on the state pension age, which of course means different ages for different people. So to choose a fixed 5.8% was never going to be equitable for all.

    Deferral is only beneficial on survival beyond that point at which the present value of the pension stream taken exceeds the present value of the pension stream given up. So any advice to defer is potentially unsound unless based on a proper analysis by a qualified underwriter or actuary imho.

  5. @ Colin Douglas

    That’s one view, but as one in this bracket it isn’t quite the full story. While one is still working (in general terms) one will often pay higher rate tax on the pension. In reality this extra amount is just frittered (when still working). However what is important when work – and therefore an earned and flexible cash flow – stops is to have the best possible cash flow in retirement. It isn’t always a matter of ‘getting your money back’ or actuarial calculations. It’s often about the biggest possible income in retirement so that you can continue to enjoy the best possible standard of living while you still breathe.

  6. As a general rule, I tend to lean towards the principle that, if you’ve paid for it, you may as well take it as soon as it becomes available. If you die next week, you’ll never see a penny of it. If you don’t need the extra income right now, why not recycle it into a PP?

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