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Why working longer could leave you with less

Elderly womans hand holding british coins bank notes

By removing the boost to people who stay in work, the government will now be penalising those who it should be rewarding Photo: Alamy

Britain’s state pension has never been known for its generosity. But one of
the lesser known perks of the system is that it’s possible to get a very
generous bonus if you decide to carry on working and take your state pension
later.

As it stands, people who defer their state pension can currently opt to
receive a lump sum (with some interest added on top), or better still, you
can choose to receive a larger weekly payment when you finally retire. If
you plump for this latter option, you’ll get an extra 10.4pc for every year
you defer. Some of this boost would have come your way whatever you’d done –
as the state pension rises each year in line with inflation. But there’s no
doubt that this bonus goes far and away beyond inflation – leaving you
significantly better off than you would have been if you’d retired at state
pension age.

Sadly, pensions minister Steve Webb is about to break up the party. As of
April 2016, people who defer their state pension will only receive an uplift
of 5.8pc a year – almost half what is currently on offer. This won’t only
have the effect of wiping out any benefit from deferring – it will also mean
that the longer you stay at work, the worse deal you are likely to get from
your state pension.

Some basic back of the cigarette packet maths shows that a woman retiring at
65 (the current state pension age), who receives the flat rate state pension
which is set to be introduced in 2016, would receive a total of around
£235,000 if she lived to her life expectancy (which is about 87 for women
who have made it to 65). But if she retired 10 years later, then under the
current system, she would receive around £100,000 more in total. In
contrast, under Steve Webb’s new rules, she’ll end up with around £10,000
less – penalised for deciding to stay on in the workplace.

Minister Steve Webb

Steve Webb claims that there is little evidence to show that the bonus for
people who defer their pension is encouraging anyone to work longer. But
this may well be because few people are aware of the scheme’s generosity. He
also claims that the £300m which the government spends on this boost to
deferred pensioners is money which would be better spent on keeping
50-somethings with health problems in the workplace.

To try and disguise this as anything other than a smash and grab by the taxman
is disingenuous. People who carry on working make a contribution – both
directly and indirectly to the taxman – which covers the cost of the boost
that they’re given. Although people past state pension age don’t pay
national insurance, their employers do – money that the exchequer would not
be receiving if they had retired at their state pension age.

Furthermore, the government benefits from deferrers by making a saving on the
amount it needs to borrow in the short-term. Not to mention the broader
benefit for the economy of keeping people in the workplace.

More from James:

Elderly
travellers charged too much for insurance

Politicians
have exploited National Insurance ignorance for too long

By removing the boost to people who stay in work, the government will now be
penalising those who it should be rewarding. And while Mr Webb may believe
that these savings would be better invested in helping 50-somethings in ill
health back to work, there’s no evidence that any such investment will be
made.

I’ve been a big fan of much of Steve Webb’s work around pensions. He’s got to
grips with many of the problems in the system – challenges that successive
ministers before him did not get the better of. But on this occasion, he’s
made the wrong call. Take advantage of the old rules while you can.

James Daley is the founder and managing director of Fairer Finance
(fairerfinance.com), the consumer group and financial ratings website. He is
also a regular pundit on the BBC One shows, Rip-Off Britain and Watchdog,
and a former editor for the consumer group Which?

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(via Telegraph)