How working longer could leave you with less

Britain's state pension has never been known for its generosity. But one of the lesser known perks of the system is that it's possible to get a very generous bonus if you decide to carry on working and take your state pension later.

As it stands, people who defer their state pension can currently opt to receive a lump sum (with some interest added on top), or better still, you can choose to receive a larger weekly payment when you finally retire. If you plump for this latter option, you'll get an extra 10.4% for every year you defer. Some of this boost would have come your way whatever you'd done - as the state pension rises each year in line with inflation. But there's no doubt that this bonus goes far and away beyond inflation - leaving you significantly better off than you would have been if you'd retired at state pension age.

The end of the party

Sadly, pensions minister Steve Webb is about to break up the party. As of April 2016, people who defer their state pension will only receive an uplift of 5.8% a year - almost half what is currently on offer. This won't only have the effect of wiping out any benefit from deferring - it will also mean that the longer you stay at work, the worse deal you are likely to get from your state pension.

Some basic back of the cigarette packet maths shows that a woman retiring at 65 (the current state pension age), who receives the flat rate state pension which is set to be introduced in 2016, could would receive a total of around £235,000 if she lived to her life expectancy (which is about 87 for women who have made it to 65). But if she retired 10 years later, then under the current system, she would receive around £100,000 more in total. In contrast, under Steve Webb's new rules, she'll end up with around £10,000 less - penalised for deciding to stay on in the workplace.

Steve Webb claims that there is little evidence to show that the bonus for people who defer their pension is encouraging anyone to work longer. But this may well be because few people are aware of the scheme's generosity. He also claims that the £300m which the government spends on this boost to deferred pensioners is money which would be better spent on keeping 50-somethings with health problems in the workplace.

Smash and grab

To try and disguise this as anything other than a smash and grab by the taxman is disingenuous. People who carry on working make a contribution - both directly and indirectly to the taxman - which covers the cost of the boost that they're given. Although people past state pension age don't pay national insurance, their employers do - money that the exchequer would not be receiving if they had retired at their state pension age.

Furthermore, the government benefits from deferrers by making a saving on the amount it needs to borrow in the short-term. Not to mention the broader benefit for the economy of keeping people in the workplace.

By removing the boost to people who stay in work, the government will now be penalising those who it should be rewarding. And while Mr Webb may believe that these savings would be better invested in helping 50-somethings in ill-health back to work, there's no evidence that any such investment will be made.

I've been a big fan of much of Steve Webb's work around pensions. He's got to grips with many of the problems in the system - challenges that successive ministers before him did not get the better of. But on this occasion, he's made the wrong call. Take advantage of the old rules while you can.