Labour could consider handing more cash to those who defer state pension in bid to get Britons working longer

Labour may consider whether it could encourage Britons to work for longer by upping cash incentives for those who defer their state pension, according to a former minister. 

Today the Department for Work and Pensions (DWP) published a 'call for evidence' on the topic of state pension deferral. 

Currently, some people choose to delay taking their state pension in exchange for higher payments later in retirement.

People deciding not to claim their state pension at the earliest opportunity, currently at age 66, can get 5.8 per cent added to their state pension for each year they defer. 

But the system now is far less generous than it was before 2016, when the added sum was 10.4 per cent extra per year of deferral.  

Before 2016 it was also possible to, as an alternative, have all the deferred state pension paid out as a lump sum with interest. Now, it is added to future payments. 

According to former Minister of State for Pensions and This is Money's columnist, Steve Webb, one option the DWP would consider is making the reward for state pension deferral more generous. 

Upping the amount received if state pensions were deferred could, according to Sir Steve, make people more willing to work for longer, knowing that they could enjoy a better standard of living in retirement thanks to a higher state pension. 

Given Labour's focus on economic growth, having 'productive workers' continuing to contribute to the economy rather than retiring is likely to be viewed favourably by the Government, Sir Steve said. 

Growth was at 2.1 per cent in the 12 months to the end of August, the latest figures show.  

Webb, a partner at pensions consultancy LCP, said: 'The Government is clearly interested in whether tweaks to this system could incentivise more people to work on for longer, in order to help grow the economy.

'But decisions about whether to work or stop work are likely to be affected by a range of factors including health or caring responsibilities, and it may be that modest changes to the reward for deferral would have little impact.' 

Sir Steve cautioned that spending larger sums of public money on people willing to defer their state pension 'may not change behaviour much and may not be a good use of funds.' 

In its announcement today, the DWP said: 'This is an evidence-gathering exercise and does not propose specific policy changes or assume that the current arrangements should be retained or changed.' 

For some people deferring the state pension would be beneficial, particularly for people still earning a salary who are in good health. 

If you are working, your annual tax-free personal allowance of £12,570 would probably be exhausted by your pay.

Therefore, your state pension would be taxed in full from the first pound. 

If your salary plus your pension took you into the higher tax bracket, earning £50,271  or more, you could end up paying 40 per cent tax on anything above that level.

Waiting until you have stopped work to start taking your pension could mean you pay less tax overall. 

Private pension income is taxable too, however, so bear that in mind when planning your retirement. 

If you are in good health and are likely to have a long retirement, you would probably benefit because your enhanced pension lasts for a long time. But if you are in poor health, then you may not get back the money you missed by deferring. 

Do not make a rash decision about deferring your state pension and get professional finance advice if you need it.