By Paul Lewis
BBC Radio 4
There is no upper limit to how long a pension can be deferred
People who put off retirement and work longer could get a lump sum of up to £30,000 under plans published in the government's Pensions Bill.
The new scheme - which will begin a year earlier than expected in April 2005 - will give people who work beyond pension age a choice.
When they do retire and claim their pension, they can either have an enhanced pension increased by a fraction over 10% for every extra year they work, or they can take that increase as a lump sum.
The government will in effect save up their deferred pension and add interest to it.
The rate of interest will be announced later this year or early in 2005, but all the examples issued by the Department for Work and Pensions (DWP) assume it will be a generous 6%, far more than anyone can safely earn on money they save or invest.
On those calculations, someone with a full basic state pension of £77.45 a week, who worked for an extra five years and did not draw their pension, would get an increased pension when they did retire worth an extra £40.27 a week.
Alternatively, they could choose not to have the extra pension but to take a lump sum of £23,390.
If they worked for just two years they could choose between an extra £16.11 a week on their pension or a lump sum of £8,548.
To get the £30,000 which the government mentions you would need to defer a state pension of £100 a week, which would include about £23 of the earnings-related SERPS or State Second Pension.
People who worked longer than five years would get more. There is no upper limit to how long a pension can be deferred.
The details - in background papers published with the Pensions Bill - also reveal two extra concessions that make the lump sum a worthwhile choice.
First, it will not affect the amount of Pension Credit. This means-tested top-up to the state pension can now be claimed by around half of all pensioners.
Normally, a lump sum would count as savings, and reduce the Pension Credit paid.
But the government has said: "We want to make sure that the lump sum is ignored when most people claim Pension Credit."
Although the lump sum will be taxed, that will only affect people who already pay tax on their income.
People with an income from other sources of less than around £6,600 will pay no tax on it. And others with incomes up to around £8,500 will only pay tax on the lump sum at 10%.
Mervyn Kohler of Help the Aged explained to Money Box who would gain most:
"The people who stand most to benefit are those with pretty modest pensions who hoped to top-up with Pension Credit, who work a bit longer and get the lump sum."
And he said it was one useful concession in a Pensions Bill that had been disappointing: "It helps a bit in a bill that is short of incentives. Here at least is a genuine incentive for people who want to think about working a bit longer."
The lump sum can be inherited by a spouse, but by no-one else. So someone without a wife or husband who works longer and dies before they claim it will not be able to leave it to their heirs.
BBC Radio 4's Money Box was broadcast on Saturday, 14 February, 2004 at 1204 GMT.