Are changes to state pension deferral a retrograde step?

Malcolm McLean asks if the latest changes are in step with other reforms


Malcolm McLean asks if the latest changes to state pension legislation are in step with other reforms.

The immediate criticism from several commentators was that this was an example of significant changes of a controversial nature being ‘slipped out' at an opportune (for the government) moment with a view to minimising unfavourable publicity. A ‘good day to bury bad news', no less!

I am not sure that particular criticism stands up to closer scrutiny. The proposal, under the single-tier rules after 6 April 2016, to reduce the rate of increase for deferring for one year from the present 10.4%, as well as scrapping altogether the right to opt for a cash lump sum in lieu, were both set out in the Single-Tier White Paper presented to Parliament in January 2013. In fact, at that stage it was envisaged that the rate of increase would be halved to 5.2%, rather less than the 5.8% now proposed. So we can't, or shouldn't, really complain that this was all unexpected.

Steve Webb's announcement about the proposed future changes to the state pension deferral options raised a few eyebrows when it was made on the very last day of the parliamentary term - just as MPs were breaking up for their long summer recess.

But, having said that, I am still inclined to think that these changes - seemingly brought in to defray the overall cost of the new state pension - will not be helpful in encouraging older workers to stay on at work, perhaps for a year or two past their state pension age, in order to build up that extra pension saving they might need to enable them to retire. The Government Actuary's Department (GAD) report commissioned for the purpose by the government offered up a range for the rate increase of between 5.7% and 8.5% leaving a lot more scope for a rather higher rate than the close to the bottom figure of 5.8% chosen.

It is also arguable, at least, that the abandonment of the lump sum option here is at odds with the new freedom of choice policy that is being implemented in the private pensions sphere which will allow many savers to take cash lump sums instead of a fixed pension income.

I suspect that for most new retirees from 2016 deferral of the state pension at the new rate will not be viewed as a viable financial option and will not be pursued. The exceptions might be those who feel confident they will enjoy a very long life and will therefore more than recover the money they have given up in not drawing their pension in the initial deferral period. This would probably necessitate a 65 year old man living into his mid to late 80s compared to the returns from the admittedly very generous present arrangements where reaching a break-even point in your mid 70s seems much more achievable.

There might also be some perceived advantages for those higher rate taxpayers still in work at state pension age who expect to pay tax at the standard rate in due course when they eventually cease work and can afford to put off drawing their pension till then.

Overall, though, unless or until a better deferral rate can be paid (say the mid-point of the GAD range at about 7%) I am sorry to say I think this particular change is a retrograde step in the government's reform programme which in contrast in most other respects is progressive and forward looking.

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