Bonus for working past retirement age almost halved.

The Government has confirmed plans to drastically cut the bonus you enjoy for deferring taking your State Pension.

Currently for each week you postpone claiming your basic State Pension, your future payout increases by 0.2%. In other words, delay for a full year and your future pension is boosted by a tidy 10.4% (52 x 0.2%). In this scenario, it would take less than a decade to make up for skipping a year's pension.

However pensions minister Steve Webb quietly announced in a written statement to Parliament last week that this 'State Pension deferral rise' is to be deeply slashed in future. From 6th April 2016, this cash uplift will plunge to 0.11% for each week you forego your basic State Pension.

So in less than two years, this valuable uplift will almost halve, diving from 10.4% a year to a mere 5.8%. What's more, presently, you can choose to defer and receive a lump sum, instead of a higher weekly pension. This lump-sum option will end from April 2016 too.

These changes are expected to save the Government £200 million a year by 2020, rising to £300 million a year by 2030. 

Working longer could leave you worse off

At a stroke, Steve Webb has cut this cash bonus from 1% for every five weeks of deferral to 1% for every nine weeks of delay. 

Rather than taking ten years to benefit from delaying your State Pension, you'll now have to wait around 19 years.

Now for the good news

Despite this latest attack on State Pensions, the new deferral rate is still fairly decent. Indeed, at 5.8%, it is considerably higher than the uplift rates on offer from private or company pensions, which rarely exceed 4%.

Industry figures have admitted that the old deferral rate had been "particularly generous", and with the population living longer it's no great surprise that this is one area that has been identified for such a cut. It will still be an attractive proposition for those who aren't reliant on the State Pension, have decent health and private savings and want to carry on working.

Who will be worse off?

The deferral bonus cut will take effect from April 2016, which is also when the current State Pension scheme will be replaced by a new, flat-rate State Pension of around £155 a week. To earn this full State Pension, you would need to work and/or pay National Insurance contributions for 35 years.

Generally speaking, it will be better-off and well-paid workers who will lose out from April 2016 due to the lower deferral rate. This is because only relatively affluent workers and pensioners have sufficiently high incomes to forego their State Pensions for any considerable period of time. For the rest of us, taking our basic State Pension at 65 (or whatever our retirement age may be) will be the right choice, just as it is at present.

In theory, well-off workers who do decide to defer their state pensions for several years could be many thousands of pounds worse off from April 2016, as the following worked example shows:

• Basic State Pension (from April 2016) will be around £155 a week, or £8,060 a year.
• The current uplift of 10.4% for each year deferred is worth an extra £838.24 a year.
• The post-April 2016 uplift of 5.8% per year is worth an extra £467.48 a year.
• This cutback amounts to £370.76 a year.
• Over the course of 25 years, this change will leave a pensioner deferring by a year worse off to the tune of £9,269, thanks to the lower deferral rate (all else being equal).

Then again, anyone reaching retirement age before April 2016 can still claim the higher 10.4% rate, should they choose to, as can anyone with pensions in deferral before that date. Thereafter, given the lower deferral rate, the Government expects a surge in the number of workers deciding to take their basic State Pensions from day one.

More on pensions:

GOVERNMENT CONFIRMS "FREE AND IMPARTIAL" PENSION GUIDANCE

THE WORST PLACES TO PUT YOUR PENSION

WHY WE DON'T TRUST PENSION FIRMS

HOW TO TOP UP YOUR STATE PENSION