'Simpler' flat-rate state pension unveiled

Pensions Minister Steve Webb: "People will retire with a single, simple, decent state pension"

Plans for a "simple" flat-rate state pension have been unveiled, but many of those entering the workforce now will be worse off than under current rules.

The government's White Paper shows that there are short-term gainers but longer-term losers from the policy.

Instead of a basic pension of £107 a week plus various means-tested top-ups, recipients will get £144 in today's money from 2017 at the earliest.

The government said this was fairer for the self-employed and many mothers.

Figures in the White Paper, published on Monday afternoon, suggested that at least half of all people reaching state pension age before 2050 were likely to have a better outcome under the new system than they would if the current system were to continue. Of these, the majority would be better off by at least £2 per week.

However, by 2060, more than half would be worse off than if the current system continued, because they could not build up a state second pension.

After April 2017, people will also have to work longer, making 35 years' worth of National Insurance (NI) contributions, rather than the current 30, to qualify for the full pension.

Pension facts

  • Currently 11.5 million people claim the state pension
  • 2.8 million women receive a state pension of less than £80 a week. Only 474,000 men do so
  • 3.2 million individuals receive pension credit to supplement their retirement income

Source: DWP

Anyone who has not paid NI for at least seven, or possibly even 10, years will not qualify for the new state pension at all.

The system of pension credit will continue, but only to provide those ineligible for the new pension with a safety net.

'Complicated'

The current full state pension is £107.45 a week, but can be topped up to £142.70 with the means-tested pension credit, and a state second pension which is based on National Insurance contributions.

Anyone who qualifies for the state pension before April 2017 will continue to receive their entitlement under the current system.

For new pensioners from April 2017, the second state pension will be abolished.

The replacement - the universal flat-rate payment in England, Wales and Scotland - will be the biggest overhaul of the pension system for decades.

Pensions Minister Steve Webb said that the single payment would make it clearer for people to see how much extra they needed to save, in private or workplace pension schemes, for a comfortable retirement.

He told MPs that 10 million people were not saving enough for their pension.

Winners and losers

Winners include:

The self-employed, who currently do not build up a state second pension

Those who have spent time out of the workforce, such as mothers and carers of those with disabilities, will benefit in the short-term

Losers include:

Many of those entering the workforce now are likely to receive less than they would have done had the current system remained in place

Those who have fewer than seven, or possibly even 10, years of National Insurance contributions, who will get no state pension under the new rules

"The current state pension system is too complicated and leaves millions of people needing means-tested top-ups," he said.

"Our simple, single-tier pension will provide a decent, solid foundation for new pensioners in an otherwise less certain world, ensuring it pays to save."

But Labour said that the government had "dithered and delayed" over proposing reforms.

"We support sensible pensions reform but this government has consistently acted with secrecy and incompetence and we will study these plans very closely to ensure ministers are completely straight with the millions of hardworking people who will lose out under these plans," said Gregg McClymont, the shadow pensions minister.

Overhaul

The change involves merging the state second pension with the basic state pension, to create one flat-rate payment.

The self-employed will benefit, as they tend to get a lower state pension. Women who have taken time out of the workplace to bring up children are also set to benefit.

"[These are] 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," said Chris Curry, from the charity the Pensions Policy Institute.

Work and Pensions Secretary Iain Duncan Smith said: "This reform is good news for women who for too long have been effectively punished by the current system.

"The single tier will mean that more women can get a full state pension in their own right, and stop this shameful situation where they are let down by the system when it comes to retirement because they have taken time out to care for their family."

Under the new system, anyone who works, has been claiming benefits for being unemployed, has been looking after children aged 12 or under, or caring for sick or disabled adults for 35 years will receive a fixed pension of £144 a week when they reach state pension age.

The amount will be lower if they have fewer "qualifying years" of this kind.

However, it will be updated each year - as the state pension is now - in line with earnings, prices, or 2.5%, whichever is higher.

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

Mr Webb told MPs that he wanted to see a review of the state pension age every five years, starting in the next Parliament.

He also said that all current workers' accrued second state pension rights will be recognised, so they will be paid a top-up to the new, merged, flat-rate payment.

Overall, the system will mean the cost of the state pension to the government is unlikely to change much. It will account for about 8% of GDP by 2060, the government's figures show.

Effect on employers

The effective abolition of the separate state second pension, and its incorporation into the new enhanced single-tier version, will end the complicated system of so-called "contracting out".

Shadow Pensions Minister Gregg McClymont warned of ''heavy losers'' if the proposals go ahead

In this, members of final-salary pension schemes, in both the private and public sector, pay reduced National Insurance (NI) contributions, but receive no state second pension.

From April 2017, employees in those schemes will have to pay more NI, amounting to a further 1.4% of the relevant earnings on which NI is levied.

To reflect their lower NI contributions made prior to April 2017, these workers will initially be eligible only to receive a reduced version of the single-tier pension when they eventually retire.

But between April 2017 and retirement their new, higher, NI contributions will see them accrue more of the new single-tier pension, up to the maximum of £144.

There will be a bigger impact on employers.

They too pay lower NI contributions if their pension schemes are currently "opted-out" of the state second pension.

From 2017, these employers will also have to pay higher NI, amounting to 3.4% of their employees' relevant earnings.

To offset this, employers will be allowed to reduce their employees' pension benefits, or put up their members' contributions.

The law will be changed to allow this to happen, even if pension scheme rules currently allow scheme trustees to object.

"Around 90% of those reaching state pension age in the first two decades after implementation will gain enough extra state pension over retirement to offset both the increased National Insurance contributions they will pay over the rest of their working lives and any potential adjustments to their occupational pension," the White Paper said.

More on This Story

The BBC is not responsible for the content of external Internet sites

More Business stories

RSS

Features & Analysis

Elsewhere on the BBC

  • Abandoned stadiumShow's over...

    ...but what happens next? BBC Culture takes a look at what happens to abandoned stadiums

Programmes

  • A woman sits on a bed in a scene from Gustav Deutsch's latest film about Edward Hopper's paintingsTalking Movies Watch

    How film-maker Gustav Deutsch brought Edward Hopper’s paintings to life

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.