Pensions minister Steve Webb has set out plans to halve the extra state pension people receive when they defer retirement in a move which will save the Government £300m a year.

Currently, the Government incentivises people to delay taking their state pension by increasing the payment by around 10 per cent a year for each year after state pension age.

Webb says there is little evidence the incentive encourages people to work longer and has tabled an amendment to the Pensions Bill which would reduce the annual deferral increase to around 5 per cent a year from April 2016 onwards.

The Department for Work and Pensions estimates the change will save the Government £200m a year in 2020 and £300m a year in 2030.

Webb says: “We propose that for every 10 weeks a person defers taking their pension, they get an extra 1 per cent on their pension.

“Earlier, I rounded that up crudely to state it as 5 per cent a year, as opposed to the current figure, which is about 10 per cent a year.

“We are therefore halving the advantage given for deferral.”

Webb says the reasons for putting forward the amendment are both financial and “conceptual”.

He says: “The measure does save us money. If we did not do what I have described, in 2020 the scheme would cost another £200m a year and in 2030 another £300m a year – significant sums.

“However, the justification is also conceptual. We do not have much evidence that spending money on incentivising people to defer their state pension really does anything.

“If we want to spend public money to enable people to work longer, my strong view is that keeping people in the labour market in their early 50s who might drop out because of ill health and a bad back is money vastly better spent than spending it on giving people slightly bigger increments because they draw a pension at 67 and not 66.”

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