24 February 2004 - Generous interest rate set for state pension lump sum
Pensioners will be able to choose to take their state pension late and receive it as a lump sum under new government plans. It was announced today that 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 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.
Andrew Smith said:
“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. 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 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.
Andrew Smith also confirmed that from April the basic state pension would rise to £79.60 per week for a single pensioner and £127.25 for a couple. This means that the basic pension has risen by £5.45 a week in real terms for single pensioners and £8.75 for couples since 2000. Pension Credit will go up faster, by over £3.00 a week, to guarantee that no single pensioner need live on less than £105.45 a week, and no couple need live on less than £160.95.
Notes for editors
[an error occurred while processing this directive]- The following table shows the gains possible from deferring:
Type of pension
Underlying amount at point of claim
Years of deferral
Lump sum accrued before tax
Weekly
Annual
Average newly retired woman
£60.00
£3,120.00
1
£3,214
2
£6,622
5
£18,120
Basic pension only (single rate)
£77.45
£4,027.40
1
£4,149
2
£8,548
5
£23,390
Basic pension only (couple rate)
£123.80
£6,437.60
1
£6,632
2
£13,663
5
£37,388
Average newly retired man
£100.00
£5,200.00
1
£5,357
2
£11,036
5
£30,201
Basic plus large additional state pension
£150.00
£7,800.00
1
£8,036
2
£16,555
5
£45,301
All figures are in 2003/4 price terms. Lump sum calculated at 6%.
- A married couple, both with average pension entitlement, who defer for 5 years, could each receive a taxable lump sum which, when added together, would be worth over £48,000 in today’s terms.
- Men are retiring today with an average state pension of £100 per week. For newly retiring women, the average weekly amount of state pension is £60.
- Around 30,000 people a year are now retiring on state pensions of £150 per week or more.
- The option to defer your state pension and receive it as a lump sum is part of the Pensions Bill which was published by the Government on 12th February 2004. The full bill can be read at:
http://www.publications.parliament.uk/pa/cm200304/cmbills/057/2004057.htm - A fact sheet outlining the details behind state pension deferral is available at: www.dwp.gov.uk/publications/dwp/2004/pensions_bill/tsp_factsheet.pdf (167KB)
- Changes to the rates of Retirement Pension and Pension Credit take place in April 2004.
Press office: 020 7238 0643
Out of hours: 07659 108 883
Public enquiries: 020 7712 2171