New flat-rate state pension plans unveiled

Watch: Pensions Minister Steve Webb says: "We want a single, decent pension for all"

Plans for a new flat-rate state pension and a system to automatically raise the pension age have been published.

Under government proposals, the existing means-tested arrangements would be replaced for new, but not existing, pensioners.

The current full state pension is £97.65 a week, but can be topped up to £132.60 with pension credit.

This could be replaced by a new £140 flat rate, with inflation expected to push this up to £155 by 2015 or 2016.

A second, less radical option would see a set amount of state second pension paid for each qualifying year of National Insurance contributions.

No set date for implementation has been revealed.

Simplification

The plans are aimed at simplifying the system, and encouraging people to save for their retirement by knowing exactly what they would get from the state.

"Tomorrow's pensioners do face a very different world," said Pensions Minister Steve Webb.

"They will, on average, be working for a lot longer, they will be retired for longer, they will not on the whole have final salary guaranteed pensions in the way that perhaps their parents did.

"We therefore need a simpler, clearer foundation because more of them will now be asked to save for their retirement."

Work and Pensions Secretary Iain Duncan Smith said: "We have to send out a clear message across both the welfare and pension system: you will be better off in work than on benefits and you will be better off in retirement if you save."

The state pension age will rise to 66 for both men and women by 2020.

The government's proposals suggest that this should continue to rise automatically in line with longevity.

This could be done either through a formula linking pension age to average life expenctancy, or through a regular official review.

Changes

Under current arrangements, a minimum income guarantee ensures couples get £202.40 a week through the means-tested pensions credit.

Start Quote

While we welcome proposals which could help future pensioners, we urge the government to rethink on help for today's pensioners ”

End Quote Rachel Reeves Shadow pensions secretary

A green paper opens consultation on a new simplified state pension that would end the means-tested element of the state pension.

Two options are suggested. One is a universal £140-a-week payment to anyone who has 30 years of National Insurance contributions.

The second would bring forward plans to replace the second state pension with a payment of £1.60 for each qualifying year. So, somebody with 30 years of contributions would receive £97 in basic state pension and £48 in state second pension, making a total of £145 a week.

Caring for a young child or an elderly dependant would count as a qualifying year, in the same way as a year in employment.

But it is the option of a universal flat-rate payment that would be the biggest overhaul of the system for decades.

Some of the key points will include:

  • The flat-rate pension will only be available for new pensioners reaching state pension age, rather than the millions of existing pensioners
  • The basic state pension will rise each year in line with average earnings, the Consumer Prices Index measure of inflation, or 2.5%; whichever is the greater
  • The state second pension will be abolished, but the government would honour contributions that had already been made ahead of the change
  • At least 30 qualifying years of National Insurance contributions will be required for the full state pension. A minimum level of seven years will be set, under which no state pension will be paid.

The proposals, if given the go-ahead, could create a two-tier system of state pension for some time.

Existing pensioners, when the system changed, would still gain their entitlement under the old system, but those who reach pension age after the changes come in would get the new flat rate.

So, as a result, a 76-year-old could get a different amount to a 66-year-old after the changes come in.

"I want to make it clear there is no extra cash for new pensioners," Mr Webb told the BBC News website.

A date could be set, so those who reach pension age the day before the changes would spend their retirement years under the old system, whereas somebody who hits their pension age birthday the day after the changes would receive their pension under the new system.

Key issues

This plan would also bring "contracting out" arrangements to an end, where some people pay lower National Insurance contributions because their second state pension is contracted out to their company final-salary pension scheme.

Watch: Patrick Bloomfield says pensions "should be linked to life expectancy"

As a result, these people's National Insurance bill would rise, but their state pension would also be greater. The extra cost to employers could also push more to close their final-salary schemes.

Joanne Segars, of the National Association of Pension Funds, said: "The end of contracting out by defined benefit pension schemes is an inevitable part of simplification.

"But the government must make an early promise that it will make it simpler for schemes to contract back in. It must not load extra costs and red tape on these pension schemes, which are under severe pressure."

More than one-and-a-half million eligible pensioners do not claim pension credit, and the government believes that such individual losses of entitlement would not occur under a simpler flat-rate system.

The self-employed, and some women, are also likely to benefit, as National Insurance rules have meant they have tended to get a lower state pension.

However, there is likely to be debate about the fairness of a flat rate that makes no distinction between poor and wealthy pensioners.

Rachel Reeves, the shadow pensions minister, said: "A pension system that would deliver £155 for everyone is a welcome step, and we will look carefully at the details of the government's announcement, especially the effect on women's retirement income."

But she added that the state pension age was rising faster than planned for hundreds of thousands of women.

"While we welcome proposals which could help future pensioners, we urge the government to rethink on help for today's pensioners and for the people hit hardest by increasing the state pension age by up to two years," she said.

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