Pensions: Questions raised over state pension funding

image captionPensioners will not become rich if the flat-rate pension became a reality

Questions have been raised over the costs of replacing a means-tested state pension with a flat-rate payment.

The government is considering an overhaul of the system, with suggestions that every pensioner could get £140 a week.

Charity Age UK said it was looking forward to more details to judge the winners and losers under the scheme.

And one National Insurance specialist has estimated that the government must find £11.4bn a year to fund the change.

David Heaton, of Baker Tilley Tax and Accounting, said this amount might have to be even higher to pay all of the 12.5 million state pensioners the full £140 a week.

Running costs

At present, the maximum state pension is £97.65 a week for a single person.

Pensions are topped up to £132 a week for the poorest, through the means-tested Pensions Credit.

Mr Heaton said that Department for Work and Pensions (DWP) statistics showed that 5.5 million people received less than £100 a week, so to raise their income to £140 a week would cost £220m a week, or £11.4bn a year.

The DWP will spend £6bn in retirement pensions this year, he said, with running costs of £1.3bn.

He suggested that the plan would need a significant increase in National Insurance contributions.

This would bring the UK system closer to that of Germany where there are statutory pension contributions and another scheme to contribute towards the cost of unemployment, sickness and industrial injury. All these are wrapped up in one National Insurance contribution in the UK.

"If the UK government wants people to have better benefits, it will need to convince them - or their employers - to pay for any improvements," Mr Heaton said.


The government's plans for a flat-rate payment are only at discussion stage at present, but groups such as charity Age UK have said changes would benefit women who have not built up much in National Insurance contributions.

Those who do not claim the extra pension that they are entitled to under the means-tested element would also welcome such a change.

But the charity warned that not enough was known about how the system would work to come to a final conclusion.

"We look forward to a more detailed analysis of this significant financial reform, and its impact on people in later life, which will enable us to identify those who will benefit from the transformation of the pension system, and those who could potentially miss out," said Michelle Mitchell, of Age UK.

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