London: The financial boost older people can enjoy by delaying taking their state pension is being slashed almost by half, it has emerged.
The move means some future pensioners who decide to defer their state pension for several years will receive thousands of pounds less than people get now.
At the moment, if you put off claiming your money for a year, you can get an extra 10.4 per cent. But pensions minister Steve Webb has announced this will be cut back to 5.8 per cent.
So what does it all mean, who’s affected, and what should people do?
What’s this all about? Many older people probably aren’t aware that they don’t have to take their state pension as soon as they reach retirement age and can get extra money by putting off claiming it for a while (or by choosing temporarily to stop receiving it). This is known as “state pension deferral”. Normally you have to put off claiming all your state pension ie your basic state pension plus any state second pension.
Why would someone do that? The advantage is that you’ll receive a higher weekly amount later. So for people who can manage without the state pension for a while perhaps because they are working or have another form of income this holds an obvious appeal. From April next year, savers will be given much more freedom over what they do with their pension money. Some people may wish to delay their state pension and live on the income from their company pension or savings for a while.
But not everyone will be keen to defer. Some will take the view that they would prefer to take what’s theirs now rather than wait, because they don’t trust the government on pensions.
But in purely financial terms, deferring currently represents a very good deal. At the moment, your deferred pension will increase by 10.4 per cent for each full year you put off claiming (it’s an extra 1 per cent for every five weeks you delay). This rate was set deliberately high some years ago to encourage people to carry on working.
People also have the opportunity to defer and receive a lump sum rather than a higher weekly amount, but this option will end from 2016.
So what’s happened? As many readers will know, the government is bringing in a new flat-rate “single-tier pension” in April 2016 that’s expected to be worth around 155 a week. This huge change has had lots of knock-on effects.
The government has decided the 10.4 per cent rate is too generous, and is hacking it back to 5.8 per cent. This latter rate applies to everyone reaching state pension age after April 2016 (that’s men and women currently 63 and 61 or younger respectively). Crucially, anyone who reaches state pension age before April 2016, or who is already deferring their pension, will continue to enjoy the 10.4 per cent rate.
