By Vivienne Russell | 20 August 2013
More people could choose to start receiving their state pension as soon as they are eligible, following planned changes to deferment payments, consultancy Hymans Robertson has warned.
In an analysis of the impact of the reforms, announced by pensions minister Steve Webb last month, the actuarial firm said this rush to claim the state pension could place further strain on the public finances.
Webb said he intends to use the Pensions Bill to halve the annual uplift paid to people who delay receipt of their state pension.
Uplift of 10% a year was introduced in April 2005, offering an individual who defers for one year almost £600 in extra pension annually. Someone who defers for five years will receive an annual pension boost of nearly £3,000.
However, government plans to slash the annual uplift to 5% will seriously dent deferrers’ retirement income and could lead to a drop off in the number of people opting to delay, Hymans Robertson noted.
Partner Chris Noon said: ‘If the benefit of deferring state pension receipt falls to around 5%... 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.’
According to Hymans Robertson’s analysis, cutting the uplift rate to 5% will cost an individual nearly £6,000 over 20 years of retirement. Where someone chooses to defer for five years, the loss is close to £29,000 over the same period.
Noon observed that there was ‘justification’ to cut the uplift as low interest rates means the scheme no longer pays for itself. When the scheme was introduced, the Bank of England base rate was 4.5%.
‘The gap between the 0.5% base rate and the 10% uplift has grown too large,’ he said.
But he added: ‘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 lose some of its value for those who can afford to delay taking it.’
According to Webb, cutting the uplift rate to 5% would save the government £300m by 2030.