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New state pension ‘to be simpler’

January 14th, 2013 Bussines

 
Pensions Minister Steve Webb

Pensions Minister Steve Webb: “We will provide a single, simple, decent state pension”

A new flat-rate state pension likely to start in April 2017 will be outlined by the government on Monday.

The weekly payment will be £144, plus inflation rises between now and 2017.

The current full state pension is £107.45 a week, but can be topped up to £142.70 with pension credit, and by the state second pension.

Plans to introduce legislation were announced in 2011 and detailed proposals are now ready.

These have been expected for some time, with the aim of simplifying the system by merging the state second pension with the basic state pension, to create one flat-rate payment.

The pensions minister, Steve Webb, said the new system would be much simpler.

“At the moment, nobody has a clue what the state is going to pay them,” he told the BBC.

“We have a basic pension, a second state pension, a pension credit – it’s fiendishly complicated. So we are proposing a simple system, not a more expensive one… that will help people plan for their retirements.

“Now, men and women will build up pensions in their own right. And women coming up to pension age who have got a damaged pension record, because they brought up children, will have that restored,” he added.

Overhaul

A universal flat-rate payment in England, Wales and Scotland would be the biggest overhaul of the system for decades.

The new single-tier pension will be paid only to new pensioners reaching state pension age from 6 April 2017, the government is expected to announce.

Elderly person holds money

Millions of existing pensioners, and those who qualify before then, will receive their entitlement under the current system.

More than one-and-a-half million pensioners do not claim the pension credit that they are entitled to, and the government believes that this would not occur under a simpler flat-rate system.

The self-employed are also likely to benefit, as they tend to get a lower state pension.

Paul Johnson, director of the Institute For Fiscal Studies (IFS) said: “The self-employed will be the one group who are unequivocally better off in the long run, because at the moment they are not earning any state second pension, and in the long run they will get the whole £144 or so.”

Chris Curry, from the charity the Pensions Policy Institute, said the people who would benefit from the new system would be those who had traditionally done very badly under the current system, such as women.

“So people who don’t make enough contributions throughout their working life to, in particular, the state second pension, which includes people with intermittent work patterns, periods of low earnings and the self-employed,” he said.

“So a lot of women will do better from this particular policy, as will people who are spending long periods of their career in self-employment.”

Second state pension

The benefit for these people is that they will effectively have access to part of the state pension that is currently closed to them. However, this will be partly offset by the requirement to make contributions for longer through National Insurance, in order to get the full amount.

Those who have paid for less than 35 years will see their pension reduced, in a change from the 30-year threshold introduced a few years ago.

The government will say that anyone who has not paid National Insurance (NI) for at least 10 years will not qualify for the enhanced state pension.

The government will also explain exactly how the state second pension, which acts as a top-up to the basic state pension, will be removed.

At the moment, some prospective state pensioners will accrue a higher level of state pension than £144 a week, via a combination of their basic and state second pensions.

As the government has promised that all their accrued pension rights will be recognised, the new system may have to involve some future pensioners being paid a top-up to the new, merged, flat-rate payment.

This would recognise the contributions that they have already made for their state second pension.

Final-salary pensions

Meanwhile, several million employees in the private and public sectors are opted out of the state second pension because their final-salary schemes pay an equivalent benefit.

As a result, they pay reduced NI contributions.

The change will bring an end to this system of “contracting out”, with two consequences.

The government will have to decide if these individuals should receive the full flat-rate pension, if they first qualify for it after April 2017, despite the fact that they will not have not been making full national insurance contributions for the state second pension in the preceding years.

The government must also decide if these people should start paying higher NI contributions, after that date, while still in work.

Someone on an average wage who is affected in this way might have to pay an additional £270 a year but their state pension would also be greater.

Paul Johnson said: “The result for most public sector workers would be therefore somewhat higher NI contributions, but also rather higher pensions and payments.”

“At the moment, if you are on a public sector occupational scheme, you are effectively giving up your right to the state second pension. Under this new system, you would get the full flat-rate pension, plus you would continue to get your public sector occupational scheme,” he added.

Under established plans, the state pension age is rising in any case to 66 for both men and women by 2020, with further plans for this to increase to 67 between 2026 and 2028.

The state pension is expected to continue rising, as now, in line with earnings, prices, or 2.5%, whichever is higher.