22nd July 2014
Following the Government’s media salvo on pension reform this week it has now also confirmed that the amount of extra state pension people receive when they defer retirement will be slashed by almost 50%.
Under the present rules, those who postpone taking their state pension, receive an increase of 10.4% per annum for each year delayed. But Minister for Pensions Steve Webb said on Tuesday that the Government is now going to cut the rate of increase granted to state pension deferral for anyone retiring after April 2016.
Anyone who reaches state pension age before that date will still be able to defer their state pension and benefit from an annual increase of 10.4% on the deferred income. However anyone hitting state pension age after April will see this rate plummet to 5.8%.
The Minister for Pensions Steve Webb MP said: “Earlier this year the Department commissioned the Government Actuary to provide a Report on the actuarially fair rate of increments for those reaching State Pension age on or after 6 April 2016 and choosing to defer their State Pension beyond State Pension age.
“Following careful consideration of the information provided, the proposed new rate will be 1/9th of 1% for each week the state pension is not claimed. This means a 1% increase for every nine weeks of deferral or around a 5.8% increase for each full year.”
Tom McPhail, head of pensions research at brokers Hargeaves Lansdown said after this week’s strong PR message on the new pension freedoms, the Government is using the last day of term – parliament goes into summer recess from Tuesday – “to shovel out the less popular outstanding announcements before heading off on holiday”.
He added: “The reduced rate of increase now means that someone choosing to defer for one year will now have to live for around 19 years to benefit from the decision; this compares to only around 10 years under the current rate of increase of 10.4%. This might still be an attractive proposition for someone in good health with substantial private savings or who is willing to carry on working.
“It is important to bear in mind that the old (or current) rate of increases has been particularly generous. With the population living longer and more people staying in the workforce later, it is hardly surprising that the government has chosen to cut back on this generous rate of return.”