New government ‘call for evidence’ on state pension deferral – could government be looking at new ways to encourage longer working?

The DWP has today published a ‘call for evidence’ on the issue of state pension deferral.

Since 2016, those deciding not to claim their state pension at the earliest opportunity can get an increase of 5.8% for each year that they defer. This extra state pension is designed to be broadly neutral to the government (and the individual), so that on average those who defer will get roughly the same amount over their retirement as those who claimed on time. But the current rules are much less generous than the pre 2016 regime where the reward was 10.4% per year of deferral, and where it was possible (as an alternative) to have all the deferred pension paid out as a lump sum with interest.

The current call for evidence may be designed to inform the Pension Commission’s deliberations, with their final report now expected in February 2027.

One option would be to make the reward for deferral more generous. This might make people more willing to work on for longer, knowing that by doing so they could enjoy a better standard of living (through a higher state pension) when they did stop work. Given the government’s focus on promoting economic growth, having productive workers going on contributing to the economy rather than retiring is likely to be viewed positively by the government.

However, there is some evidence that deferral is not well understood.

Some people may accidentally ‘defer’ taking their pension because they do not realise that a claim has to be made for the pension to be paid. Others may defer for a relatively short period in order to line up their retirement date with that of a spouse or partner. And others may work on because they want to do so, regardless of the level of reward for taking their state pension later. If so, spending public money on larger rewards for taking pension later may not change behaviour much and may not be a good use of funds.

Commenting, Steve Webb, partner at LCP said:

“Some people do not realise that the state pension is not paid automatically when you reach pension age – it is necessary to make a claim. It is also possible to deliberately ‘defer’ taking your state pension in return for a higher pension later. The Government is clearly interested in whether tweaks to this system could incentivise more people to work on for longer, in order to help grow the economy. But decisions about whether to work on or stop work are likely to be affected by a range of factors including health or caring responsibilities, and it may be that modest changes to the reward for deferral would have little impact.”