The government has proposed halving the deferred state pension increase rates from 6 April 2016.
Currently, UK workers who reach the state pension age before 6 April 2016 will be able to defer their state pension and benefit from an annual increase of 10.4% on the deferred income.
Under the proposals, anyone who reaches the state pension age after 6 April 2016 will receive an annual increase of 5.8% on the deferred income.
The government intends to publish draft regulations that set out the proposed rate in the Pensions Act 2014 later this year.
The proposals follow a report by the government actuary on the actuarial fair rate of increments for those who reach the stage pension age on or after 6 April 2016 and choose to defer their state pension beyond state pension age.
Steve Webb (pictured), pensions minister, said: “Following careful consideration of the information provided [by the government actuary report] the proposed new rate will be 1/9th of 1% for each week the state pension is not claimed.
“This means a 1% increase for every nine weeks of deferral or around a 5.8% increase for each full year.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, added: “The reduced rate of increase now means that someone choosing to defer for one year will have to live for around 19 years to benefit from the decision; this compares to only around 10 years under the current rate of increase of 10.4%.
“With the population living longer and more people staying in the workforce later, it is hardly surprising that the government has chosen to cut back on this generous rate of return.”
Kay Ingram, divisional director of individual savings and investments at LEBC, said: “The reduction in the increase on state pension deferral from 10.4% per year to 5.8% is quite a big step change and may cause many who are deferring their state pension to reconsider whether that is the right thing for them to continue to do.
“That said, the deferral rate previously in place was quite generous and had not been overhauled for some time. While inflation and interest rates remain low, the 5.8% rate may still be attractive to some who are not yet drawing their pensions.”