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08

Actuaries warn on costs of state pension deferral reforms

Open-access content 19th August 2013

Planned changes to deferment rules could make people who choose to delay taking their state pension thousands of pounds worse off, actuaries Hymans Robertson have warned.

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Currently, people who postpone their state pension receive a 10% uplift in payments for each year they delay. An individual who defers for one year, can expect an additional £579 in their annual state pension. For someone who delays for five years, this rises to £2,893.

However, pensions minister Steve Webb last month said he intended to use the Pensions Bill to halve the deferment uplift to 5%.

An analysis by Hymans Robertson, released today, showed that cutting the annual hike in this way would cost someone who defers for one year almost £6,000 over 20 years of retirement. When someone defers for five years, the loss would be almost £29,000 over a 20-year post-retirement period.

Chris Noon, partner at Hymans Robertson, said: 'If the benefit of deferring state pension receipt falls to around 5% as indicated by the minister then a large percentage of these people will choose to take their pension as soon as they are eligible. Given the significance of state pension to overall government finances this may not be good news for the national deficit.'

He added that, in the current low-interest rate environment there was justification for the change. The 10% uplift was introduced in April 2005 when the base rate was 4.75% and the government was able to generate sufficient interest from the deferred pension payments to cover the cost.

'Today however, the gap between the 0.5% base rate and the 10% uplift has grown too large, even after allowing for longevity. The danger of reforming deferral now is that by the time changes come into force, interest rates may well be on the rise again and the state pension may have lost some of its value for those who can afford to delay taking it,' said Noon.

Hymans Robertson based their assessment on assumptions used by the Department for Work & Pensions in their document, State pension deferral – your guide.

This article appeared in our August 2013 issue of The Actuary.
Click here to view this issue
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Topics:
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