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The option to put off claiming the State Pension in return for a higher amount has been part of the system since 1948.

Initially, increments were based on the number of flat-rate contributions paid during the period of deferment. However, since April 1975, they have been calculated as a percentage of the basic State Pension and based on the length of time deferred – 7.4% of the weekly rate for each full year deferred.

The Labour Government made changes in the Pensions Act 2004, improving the rewards for deferral to encourage flexible retirement (Cm 5677, ch 6, para 39-43) by:

  • increasing the amount of extra pension gained 1% for each five weeks deferred (or around 10.4% for each full year); and
  • introducing the option of a lump sum for those who had deferred for at least a year.

For people reaching State Pension age from 6 April 2016 – and therefore eligible for the new State Pension – the reward for deferral has been reduced (to 5.8% of the weekly rate for each full year deferred) and the option of the lump sum has been removed (Pensions Act 2014, s16-18 (SI 2015/173, reg 10). The Government’s intention was to set the reward for deferral at a rate that would “more closely reflect the value of the income foregone” (Explanatory Notes to SI 2015/173 para 7.27;  DWP, Single-tier Impact Assessment, October 2013, para 50).

When the legislation was before Parliament, Labour Peer Baroness Hollis argued that the option of a lump sum should be retained, given the importance of savings to meet unexpected costs. Responding, the then Work and Pensions Minister Lord Freud said people still had the option of delaying their State Pension claim for 12 months and receiving the arrears as a lump sum (although there would be no interest on the arrears). The Government wanted its State Pension reforms to be cost neutral and the reduced incentives to defer played a “key role in flattening expenditure”(HL Deb 24 February 2014 c776-8).

The Cridland Review of the State Pension age recommended that the Government re-introduce the option of a lump sum on deferral and change the rules to enable partial drawdown of the State Pension so that people could afford to continue working but reduce their hours (Final Report, para 5.6.1-2).

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