Public Servant Lifestyle

Pensioners will be able to choose to take their state pension late, and receive it as a lump sum, under new government plans (see explanatory factsheet).

The interest rate used to calculate the sum will be at least 2% above the Bank of England base rate, guaranteeing a good deal for those who want to keep working longer.

Secretary of State for Work and Pensions, Andrew Smith, revealed to the House of Commons that a man with the average £100 a week of state pension, and who defers for five years, could build up a lump sum of £30,000. People could also achieve a substantial lump sum by deferring their pension for just one or two years, and women will be able to start building up a lump sum from the age of 60.

The option to build up a lump sum forms part of the Pensions Bill and is expected to be introduced in April 2005, with the payments made in April 2006.

"For the first time ever we are giving people the chance to defer their state pension and then take it as a lump sum, which for many will be £30,000 or more," says Andrew Smith. "Until now, pension lump sums have been the preserve of those with good occupational pensions - now they will be an option for everyone. For those drawing their pension later, we'll also be offering the alternative of a much higher pension for life.

"We're keeping the state pension age at 65 - we're not in the business of forcing people to work longer. The lump sum can help to reward those people who chose to continue working - which with
longer, healthier lives, is something more and more people will want to do."

New tax arrangements mean the lump sum will be taxed at the marginal rate applied to people's other income in the year they claim it, so no one will be brought into tax, or move up a tax band, as a result of claiming a lump sum. People will also be able to choose to delay receiving it until the following tax year, when their income may be lower. The lump sum will not affect the age-related personal allowance.

Poorer pensioners, says the Government, need not worry about being short-changed. Pension Credit and other benefits will be adjusted so that building up a large lump sum need not reduce entitlement.

Background Information: