Deferring the Basic State Pension
People can already put off taking their BSP when they reach State Pension Age (SPA) if that’s what they want to do, and the Government types increase the pension by about 7.5% a year where people do that. We’ve always been able to, but at the moment we can only put off taking our BSP for five years. This five-year rule, by the way, was going to be knocked on the head in 2010 because of provisions in our last Pensions Act, the 1995 model. Well, one of the things this year’s model is proposing is that the five-year rule is abolished from A-Day (6 April 2005) instead. So they’re talking about bringing it forward a bit, that’s all.
Another thing the 1995 Pensions Act already had in place from 2010 was that the annual rate of increase to deferred State Pensions was to go up from a fairly generous 7.5% to a very lucrative 10.4%. This too is proposed to come forward from 2010 to 2005 if Parliament agrees. Let’s hope they do. It looks to be a very generous concession.
What was brand new in last week’s Pensions Bill is the idea that people deferring taking their BSP will now get the option of having a lump sum payment (made up of all the deferred payments plus interest) when they decide to start taking their BSP. So, we will be able to have either an increased BSP from a later date, or an unincreased (if there’s such a word) BSP plus a lump sum.
On the face of it this is a really good option, particularly as the Pensions Bill recognises the fact that lump sums received late in life can have unfortunate financial implications for people who are in receipt of the Pension Credit. Basically, if you do get Pension Credit, lump sums can count against you and reduce your means-tested benefits. Well, the absolutely astounding news is that the Department for Work and Pensions (the DWP) are saying here that they “want to make sure that the lump sum is ignored when most people claim Pension Credit, Housing Benefit and Council Tax Benefit”*. Wow! That ought to be front-page news in my opinion. The Government has, in effect, decided that some of our money can be ‘invisible’ when it comes to calculating our entitlement to benefits. What a shame the same principle can’t be applied to all of our pension savings so that every pound saved towards a pension would make savers a full pound better off than non-savers. But that’s just me being picky, I suppose, and we shouldn’t really look a gift horse in the mouth (although I’ve never really understood what that means if I’m being honest, but still…).
These new rules, if they get through the Parliamentary process, are likely to change our attitude to retirement considerably – which, presumably is the Government’s intention. Someone who elects to take their BSP at State Retirement Age, but who then goes on to save the whole lot in an ISA, say, would probably pay tax on the pension. They would also struggle to find anywhere outside of the local bookies that would offer the prospect of anything like a 10.4% annual return. If you don’t really need your BSP to live on, deferring it looks a bit of a no-brainer to me. Also, an increase to the BSP due to deferment would count against means-tested benefits, whereas the lump sum won’t.
I keep thinking there must be a catch to this, but I can’t see it. Let’s hope there isn’t one in the small print when we see the Pensions Act later this year.
17 February 2004
This document is based on Scottish Life’s understanding of the draft Pensions Bill published on 12 February 2004. This is draft legislation and may be subject to change.
* DWP Website: State Pension deferral – taking up your State Pension later