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October 25, 2014 - Latest:

Upgrade to state pension deferral to be cut in half – is this the right approach?

  • 5 July 2013

Is this the correct way to defuse the pension time bomb asks John Lappin? Up till now, the Government has run a generous scheme for people who deferred taking the state pension. It was upgraded by around 10 per cent for every year they delayed.

This is, of course, difficult to replicate with any privately held pot of money. It would be very difficult to find an investment that would definitely deliver a ten per cent uplift over a 12 month period.

But now, as more and more people decide to retire later some out of choice, some out of necessity, the pension minister Steve Webb has decided to cut that increase by half. Incidentally, five per cent, is a lot closer to the sort of long term projection you might get on a reasonably diversified investment portfolio, though once again in this interest rate environment, difficult to attain over 12 months.

The move will mean that for every 10 weeks a person defers they will get roughly an extra 1 per cent on their pension.

Webb says: “The measure does save us money. If we did not do what I have described, in 2020 the scheme would cost another £200m a year and in 2030 another £300m a year – significant sums.

“However, the justification is also conceptual. We do not have much evidence that spending money on incentivising people to defer their state pension really does anything.

“If we want to spend public money to enable people to work longer, my strong view is that keeping people in the labour market in their early 50s who might drop out because of ill health and a bad back is money vastly better spent than spending it on giving people slightly bigger increments because they draw a pension at 67 and not 66.”

At Mindful Money we are not so sure. It is correct to try and keep people in work in their 50s. There is a big downside to what is effectively early retirement for some people. Yet that is surely a separate issue from people retiring later than the state retirement age. When the minister talks about evidence, or the lack of it, has he asked people?

At the very least, if this state pension incentive was going to affect your decision, maybe you should let the pension minister know. We have to make savings as a society long term. But at Mindful Money we are not sure this decision is in line with the spirit of the times.

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