Retirement savers and workers who stay in a job beyond state pension age are losing a valuable financial benefit that could leave them thousands of pounds worse off.
Pensions minister Steve Webb intends to slash the 10% bonus paid to those who do not draw their state pension every year.
Instead, the rate will be cut in half to 5%.
That means someone who decides to work five years after state pension age without drawing the funds could lose up to £29,000.
Instead of rewarding hard workers and savers, the government is taking away the incentive to work.
After inflation is deducted at the current rate, the proposed new bonus is worth a little more than 2% a year.
Winners and losers
Pension advisers consider many who choose to defer taking their state pension to pick up the 10% bonus now have little reason to do so.
As a tax-free interest rate, 10% is far higher than the best 12-month locked-in fixed rates offered by high street banks and building societies.
The current basic state pension is £107 per week, so deferring a year at 10% gives an extra £579 in interest.
Over 20 years this deferral payment comes to £11,575.
Cutting the rate to 5% gives £289 a year interest – a drop of £5,780 interest over 20 years.
Chris Noon, partner at financial firm Hymans Robertson said: “If the reward for deferring the state pension falls to around 5%, like the minister says, then many people will take their pension as soon as they can.
“Although cutting the deferral rate saves the government some money, they could end up paying out more if people decide to take their pension from day one.”
The 10% deferral rate started from April 2005, when the Bank of England base rate was running at 4.75%.
Noon explained that higher interest rates let the government generate cash from deferred pensions to cover the costs.
“The gap between the 0.5% base rate and the 10% deferral rate is too wide for the government to cover from investment without adding funds,” said Noon. “The problem is those that can afford not to take the pension will lose value because the interest rate is likely to climb higher before the legislation lowering the deferral rate passes through Parliament”
Changing the deferral rate also changes the financial plans of many workers approaching retirement who had worked out their budgets on the 10% rate rather than the 5% rate.
Not only is the deferral payment smaller, but if the opted to stay in work and now decide to take their state pension earlier, they may have income tax issues as their annual incomes will be pushed higher.
|click here to connect with an independent financial advisor for expert, whole of the market advice today.|