The value of incentives to defer the UK state pension

Abstract

Sue Farraris a Lecturer in Accounting and Finance at Plymouth Business School. Sue has an interest in contemporary development in the world of pensions and also has undertaken research in the areas of stock market effi ciency and corporate investment and fi nancing decisions. She is a Co-director of Pensions Worldwide , a research group whose work is intended to inform pensions policy, and co-editor of Social and Public Policy Review (University of Plymouth Press). Jonathan Moizeris an Associate Professor in Business Operations and Strategy, and is a Co-director of Pensions Worldwide . Jonathan ' s research interests include the use of computerised simulation for both policy decision-making and learning. He has particular interest in the use of system dynamics modelling as a simulation approach for learning and insight generation. ABSTRACT The UK state pension system is confronted by the pressures of adverse demographics and the possibility of growing retirement income security. This article evaluates one public policy response to these pressures: measures to incentivise deferral of statutory retirement. It appraises the fi nancial benefi ts of deferral options under assumptions concerning life expectancy, tax rates, real terms pension growth and length of deferral period. The results show an incentive to defer, particularly where the pension enhancement option is selected over the lump sum payment. Overall, the analysis suggests that the measures to encourage the take-up of existing fi rst pillar deferral options would be benefi cial.

UK state pension deferral incentives and sustainability

“…State pension deferral incentives can encourage later retirement from the workforce, helping to offset the demands placed on pension systems. However, depending on the generosity of the incentive and its uptake, pressures on public finances may be alleviated only in the short term by state pension deferral (Farrar et al, 2012). The trade-off between short-term savings and longerterm payments is not necessarily an equal one.…”

“…The Pensions Act 2004 introduced the choice of either receiving a taxable lump sum payment following deferral or drawing an enhanced state pension, with retirement increments increased from 7.4 percent to 10.4 percent for each year deferred from 2010 onwards. Farrar et al (2012) modelled the financial benefits of the UK's state pension deferral options, evaluating the options of receiving an enhanced pension with 10.4 percent enhancement increments or a lump-sum payment under a range of conditions. Taking into account the combined effect of the deferred pension enhancement rate, forecasts of increasing life expectancy projections and the real terms pension increases, a strong financial incentive to defer was found for both sexes but particularly for women.…”

“…We assume that individuals are rational and their choice to defer will reflect the financial attractiveness, or otherwise, of the strategy: if the enhanced pension value created by deferral does not compensate the individual for the loss of the payments that could have been claimed over the deferral period, no-one will choose to defer. Following the approach of Farrar et al (2012), the values of the deferred and enhanced pension streams can be derived, with the weekly pension receipt stream being approximated as a continuous flow. Pension receipts are assumed to grow at a rate g over the deferral period and the post-deferral pension claiming period.…”

Does the Actuarial Adjustment for Pension Delay Affect Retirement and Claiming Decisions?

“…Numerous papers have examined the impact of other changes to the U.K. pension system, including increases in state pension ages (Cribb, Emmerson, and Tetlow 2016;Blundell and Emmerson 2007) and the repeal of the earnings rule that reduced pension benefits for individuals who continued to work (Disney and Smith 2002), as well as general pension system incentives (Blundell, Meghir, and Smith 2004). Some researchers have quantified the financial incentives for delay or explored optimal claiming strategies under the claiming incentives that were introduced in 2005 (Kanabar and Simmons 2016;Dagpunar 2015;Farrar, Moizer, and Hyde 2012). 2 They all conclude that deferral is an optimal strategy for some of the population, but heterogeneity exists depending upon the predicted survival and tax rates that people face.…”