Government Slash State Pension Deferral Accrual Rate

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

Steve Webb, the Pensions Minister, announced on Monday 22nd July 2014 that individuals who look to postpone their retirement beyond the State Pension Age would receive 5.8% per annum for each year deferred, which is a reduction from the current rate of 10.4%.

For those who can afford to defer their State Pension, it is often very good value to defer the State Pension, as this 10.4% per annum, will be added to their pension for life. In simple terms, if this individual lives for a further ten years (or thereabouts) they would be expected to more than make up their money, and as a 67 year old male would be expected to live for around seventeen more years, a two year deferral can have a significant cash benefit.

In making this change, which takes place from April 2016, Steve Webb has significantly eroded the benefit of deferring the State Pension in favour of an increased income, but due to the fact it appears to still permit the lump sum payment of previously accrued State Pension, plus base rate plus 2% (presently 2.5%), which may be above current account savings, for those who are still working, particularly paying 40% income tax, or more, this could be appealing.

A common query is what happens if an individual dies before taking their pension benefit and it is normal for the benefit to be paid to their estate, less income tax. Due to a quirk of the way the lump sum benefit is taxed, this income tax should not be more than your highest marginal rate, for example, somebody with income of £40,000 per annum, would only pay 20% tax, even if they took a £20,000 lump sum from their deferred pension. Conversely, a true PAYE income would pay a significant amount of 40% tax.

The reason for the change, to quote Steve Webb, is to move to a more “actuarially fair” basis. It had always been a quirk of the rules that those who could most afford to defer their State Pension, being the wealthiest individuals in society, effectively made a significant profit by holding off for as long as they could before drawing their pension. It is true to say that these changes are likely to be fairer for the majority of people, but for those in normal or impaired health, it may be preferentially to simply take the income, or at least the deferred payments as a lump sum.

Like many pension decisions, it is hard to generalise, and if you require personalised advice please do not hesitate to get in contact.

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