This afternoon the government announced plans to introduce a new flat-rate state pension.
The new state pension will come into effect from 2017 as part of a reform package to be announced to Parliament today.
At today’s prices it will be worth around £144 a week and will only be paid to future retirees,
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The minimum number of years a person will have to pay national insurance (NI) in order to receive the full state pension payment will rise from 30 years to 35 years. Carers taking time out of work will gain NI credits.
Under the current system, an individual begins to build up state pension entitlement after one year of NI contributions. Under the new system, this will rise to 10 years.
All contracting out of NI will be scrapped from 2017. The proposals are reported to include a mechanism to allow those in defined benefit schemes who would have lost out through scrapping the contracted-out rebate to recoup this money.
In addition, the state pension age will be increased in line with life expectancy.
Barnett Waddingham consultant, Malcolm McLean, said: “The concept of a single, simpler-to-understand state pension pitched at a level that lifts as many people as possible off means testing and encourages them to save privately to give themselves a better standard of living in their later years is very desirable if not essential in a society such as ours with an ageing population.”
He warns, however, that: “The task of bringing together the various diverse components that currently collectively make up state pension provision was never going to be easy and it is inevitable that there will be some losers as well as winners in the process of change.”
According to Barnett Waddingham, the winners and losers are:
- Those for whom their state pension under the present system would have been solely the basic state pension of £107.45 per week (at current prices) including many women and the self-employed who have been excluded from building up any state second pension (formerly Serps).
- Those who would have had an entitlement to pension credit under the old system to top up their income but who would not have claimed it for a variety of reasons – pride, fear or ignorance (lack of awareness).
- Those on relatively low earnings who would be put off private pension scheme saving by the risk of losing out on or over-lapping with means-tested benefits.
- Those who beg for greater clarity in pension rules and a simpler and more understandable state pension as a basis for planning their retirement finances.
- Existing pensioners and those who reach their state pension age (SPA) before the new scheme is introduced in 2017. They will be excluded from the new scheme and many have already expressed their resentment and what they see as being treated as ‘second-tier pensioners’. Expect a political backlash on this.
- By pushing the original start date from 2015 to 2017 there will be more people who will have reached their state pension age in the intervening period and will now not qualify for the new pension. There will also be a minimum NI qualifying period of 10 years which will mean that those with less than this will receive no pension. There is also likely to be a ‘cliff-edge’ effect where someone who reaches their SPA the day before the implementation date could be awarded a pension some 40% less than someone who reaches SPA the day after.
- The position is not clear on those many thousands who have accrued rights to the state pension (S2P formerly SERPS) and would have qualified for a total pension in excess of the new rate under the old rules. Will they be limited to the new pension rate, will they still receive the higher rate and how, when and for how long will this be allowed?
- The impact of the effective ending of the ability to contract-out of S2P by salary-related occupational schemes in both the public and private sectors will be an issue for both employees and their employers. This will result in former reductions in NI rates being lost with a corresponding increase in NI payable. An employee on £25,000 a year could pay an extra £270 a year in NI with his/her employer facing an increase of £657 a year. This could cause friction in the public sector with many workers already having to pay extra for their public service pensions and could persuade more employers in the private sector to close down these type of gold plated but expensive schemes.
- It is likely that in future SPA will be pushed back more quickly to compensate for the increasing cost to the taxpayer of the state pension probably reaching 70 or beyond within the next 25 years.