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Gov’t plans to cut pension deferral rate to save £300m

by Brian Cantwell on Jul 05, 2013 at 15:12

Gov’t plans to cut pension deferral rate to save £300m

The government plans to halve the amount of extra state pension offered to those deferring retirement in an effort to save around £300 million.

The annual deferral rate is a financial incentive given to pensioners for deferring the state pension payments if they work beyond state pension age.

The deferral rate is currently 10%, but pensions minister Steve Webb (pictured) plans it by half to 5%.

The Department for Work and Pensions has estimated that cutting the rate could save between £200 million and £300 million.

It said: ‘We envisage that the rate of deferral will be broadly actuarially fair. At the moment, there is a financial incentive to defer that is equivalent to about 10% on the pension per year of deferral, but we believe that the right figure would be in the order of 5% although a lot depends on changes in longevity and so on.’

Aviva head of policy for corporate benefits John Lawson said: ‘We’ve been expecting some cuts in the annual deferral rate, but if these are confirmed as the figures it would be quite sharp, and more than we were expecting.’

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13 comments so far. Why not have your say?

Man of Kent

Jul 05, 2013 at 15:34

This might be justified if, at the same time, the DWP examined other assumptions, like the one that allows local authorities to assume that pensioners' capital between £14,250 and £23,250 generates 20.8% income when care costs are being considered.

And, please, surely there is another picture of Steve Webb somewhere, other than this one of him doing his Max Bygraves impersonation?

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sol trader

Jul 05, 2013 at 15:36

I seem to remember one of my training manuals stating that ....actuarily, state pension deferral was not a good idea any way (notwithstanding tax considerations)

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Jul 05, 2013 at 16:01

Anyone surprised that 10% was actuarially fair, and now 5% is actuarially fair, should revisit the history of actuarial valuations. It is littered with nonsensical forecasts.

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John Borgars

Jul 05, 2013 at 16:02

@ sol trader

It depends upon the age and health of the individual consider deferring pension and the real (inflation-adjusted) interest rate at the time.

Your training manual may have been correct at some time in the 1980s but today deferral for three or four years is a no-brainer for a healthy individual who doesn't need the cash in the short term.

5% is only justifiable if you assume real interest rates will stay negative - it should be 6-7%.

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Barney Stackhouse

Jul 05, 2013 at 16:14

By the time we qualify for the O A P why would we want to defer it past the already 'deferred' date that they've set by pushing the qualification age back to 68 etc. It makes me laugh!

Additionally, 200-300 million in context of the overall social security budget equates to emptying the ash trays on a jumbo jet to save weight. Just tinkering

ha ha

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Julian Stevens

Jul 06, 2013 at 07:43

My advice to my clients is to take it while it's going and enjoy it now (or pass it on to your kids). After all, you've paid for it and you might be dead next week.

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Jul 06, 2013 at 13:39

This isn't news as it was included in the single pension proposals.

However, it is odd that they are now talking about saving £300 million. If the reduced deferral rate isn't sufficient to encourage us to defer our pensions, the Government will actually increase its short term outlay.

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Jul 08, 2013 at 09:08

Article aklso negated to mention that the option to take deferred pension as a lump sum will also be removed.

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Jonathan Kirby

Jul 08, 2013 at 12:23

How can anyone plan ahead when the government are the least trustworthy of people to deal with.

It doesn't matter what is written in your 'contract' with them. If they don't like it they will change it.

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Julian Stevens

Jul 08, 2013 at 12:46

That's exactly what so many people are and have been saying for years, Jonathan. The government has reneged totally on the Conservative party's pre-election manifesto pledge to rectify all the damage done to the pensions framework and to all public confidence in it as a result of 25 years of prejudicial meddling. And now public servants across all sectors are crying foul because the government's announced that their pension entitlements are going to have to be diluted because the rest of the nation can no longer afford the colossal costs of maintaining them as they are.

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Roy Durrant1

Jul 08, 2013 at 13:08

I once did some calculations on pension deferral and compared them with taking the state pension and using the state pension to fund a PP. When you consider the tax relief on the contributions, death benefits and PCLS the option to defer didn't look that compelling. The critical yield figures weren't that high either. That's probably changed now with the ultra low annuity rates but it might be interesting to see what the number come out at?

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John Borgars

Jul 08, 2013 at 14:47

@Roy Durrant1

At current rates the tax break on PP contributions is worth more than the investment return to any basic-rate taxpayer planning to retire within 8 years - for higher-rate taxpayers it would be 19 years. The total return from even a mediocre PP is more than twice that from an equally safe alternative. So if a 65-year-old has earned income, that should not be an either-or question. I'ld rather withdraw cash from an ISA than not maximise (well, to the nearest k below) my pension contribution.

What you *should* measure is the return on pension deferral against realistic alternatives - at a pinch withdrawing cash from an ISA - and whether a 10% uplift compensates for receiving the pension for one year less: for the average healthy client in his/her 60s the answer will usually be "yes", for an unhealthy or older one, the answer will usually be "no".

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John Borgars

Jul 08, 2013 at 15:00

@ Jeff Miller

Try naming one nonsensical actuarial forecast (as distinct from a journalist's or salesman's mis-statement).

Life expectancy for 65-year-old men today is far greater than for those who retired when Attlee was Prime Minister. So a deferral that was fair in the 1940s is not the same as a fair deferral rate today.

J M Keynes said "When the facts change, I change my opinions. What do you do, sir?"

NB *I* am not being sexist - Beveridge and the Attlee government based Pensions on the assumption that the husband was the breadwinner (and the female retirement age had nothing to do with female longevity but was based on the assumption that women were on average 3-5 years younger than their husbands and the idea that they might want to retire simultaneously) with the deferral factor based solely on male life expectancy as the number of women drawing a full pension based on their own contributions was very small relative to the number of men doing so.

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