Investment Sense Verdict_istockUpdated 15th January 2013:

Over the past few days the media have extensively covered the proposed government reforms of the State Pension system and the announcement of a new flat rate State Pension. Under the proposals a new flat rate State Pension will be introduced, “not before” April 2017, of £140 per week. After adjustment for inflation this would be approximately £160 by the time it is introduced.

To qualify for the new flat rate an individual would need to have 35 years of National Insurance contributions.

In addition the State Pension age will rise for both men and women to 66 from 2020 and to 67 between 2026 and 2028. The government then plan to increase this automatically in line with longevity.

The plans are aimed at simplifying the state pension system and encouraging people to save for their retirement secure in the knowledge of exactly what they will get from the state.

Currently the full state pension is £107.45 per week, although this can be topped up to £142.70 with pension credit and many people who have remained “contracted in” to the State Second Pension (formerly known as SERPS) get an enhanced state pension.

As with any major change such this people will be affected in different ways, indeed the government has said that over the longer term the flat rate State Pension will cost no more than the current system, but just who are the winners and losers?

The Winners

People who don’t claim additional state benefits. The government believe that more than 1.5m people do not claim pension credit to which they are entitled. It is hoped that a simpler, flat rate system, will mean people do not miss out on benefits which they should be claiming.

Women. Many women take time out of employment to raise a family, which can mean they do not have a full National Insurance record.

Lower paid workers. Currently lower paid workers run the risk that any pension provision they make themselves, for example through their employer’s scheme, will simply reduce their means tested benefits in retirement. The new proposals for a flat rate pension with the removal of means testing will mean they get ‘full value’ for any contributions they make to their own private or employer sponsored pension.

Self-employed. Currently the self-employed do not qualify for the ‘top up State Pension’ i.e. SERPS or the State Second Pension, the introduction of the flat rate State Pension will therefore mean this group are a big winner, effectively increasing their basic State Pension significantly.

The Losers

Existing pensioners. If introduced the new flat rate pension would only be available to new pensioners reaching the state retirement age after April 2017 and not existing pensioners. Existing pensioners would still gain their entitlement under the old system; however it is possible that new pensioners will get more under the new system.

Final Salary Schemes. Under the proposals the option to “contract out” of the State Second Pension would come to an end which will result in a rise in National Insurance contributions for employees and employers. Final salary schemes are “contracted out” of the State Second Pension, which means those employers still running such schemes will see a rise in their National Insurance contributions. Many experts believe that this increased cost could be a further nail in the coffin of the dwindling final salary schemes still available.

Women. Although the flat rate may mean increased pensions the state pension age for women is rising to 66 from 2020.

“Contracted in”. Those people who have remained “contracted in” to the State Second Pension, formerly known as SERPS, could well get a lower pension under the new system. An individual who has maximised his or her contributions to the State Second Pension and is in well paid employment could have received a total pension from the state of up to £200 per week, the new system will reduce this. These people will get a double blow as not only will their overall pension from the state be reduced, but they will have to continue paying National Insurance at the same rate until retirement.

The government has said that previous National Insurance contributions will be recognised.

In summary

The new £140 flat rate state pension is moving ever closer to being a reality.

If the government can achieve their aim the simplicity of the new system must be welcomed. As is the end to means testing and the fact that for those making relatively modest pension contributions they can do so in the future safe in the knowledge that by “doing the right thing” and paying into a pension  they are not simply reducing the means tested benefits they are entitled to in retirement.

However weaving the new set of rules into our horrendously complex pensions system will not be easy and out of this could come unexpected losers.

7 Responses to “New state pension proposals: Are you a winner or loser?”

  1. Morgan says:

    This government has not only betrayed existing pensioners with this new pension scheme, it’s about to hit some pensioner couples who are also receiving Pension Credit, if an amendment in the Welfare Reform Bill goes through parliament in it’s present form, see below.

    Welfare Reform Bill Explanatory Notes:

    Page 22
    145. Paragraph 64 amends the State Pension Credit Act 2002 so that a member of a couple who has attained the qualifying age for state pension credit may not receive state pension credit if the other member of the couple has not attained that qualifying age. This is to ensure that all claimants who have not attained the qualifying age for state pension credit are required to claim universal credit and, if appropriate, be subject to work-related conditions of entitlement.

    But if you are single you will still be able to claim when you reach qualifiying age.

    At the moment I receive Pension Credit but it looks as though this will change soon as my wife is ten years younger than myself and with her retirement age going up we will not be able to claim again until I am 77, this makes for a poverty stricken retirment.
    Thanks a lot Cameron!!!

  2. Clive says:

    Rachel Reeves (Leeds West, Labour)

    To ask the Secretary of State for Work and Pensions

    (1) if he will prepare and publish an impact assessment in respect of the proposals in the Welfare Reform Bill affecting the qualifying age and entitlement to pension credit;

    (2) if he will estimate the saving which would accrue to the Exchequer if entitlement to pension credit were removed from an individual who reached qualifying age and were a member of a couple the other member of which had not attained the qualifying age;

    (3) if he will estimate the average change in income to (a) the individual and (b) the couple who would no longer be entitled to pension credit if entitlement to pension credit were removed from an individual who reached qualifying age and was a member of a couple the other member of which had not attained the qualifying age;

    (4) how many (a) men and (b) women would no longer be entitled to pension credit if entitlement to pension credit were removed from individuals who reached qualifying age but were members of a couple the other member of which had not attained the qualifying age in each year between 2013 and 2020.
    Hansard source (Citation: HC Deb, 9 June 2011, c421W)Email me when Steve Webb speaksMost recent appearancesNumerologyFull profile …
    Steve Webb (Minister of State (Pensions), Work and Pensions; Thornbury and Yate, Liberal Democrat)

    In the Welfare Reform Bill we are taking powers to restrict access to pension credit for couples where one member of the couple is below the qualifying age for pension credit.

    We are still considering a range of policy issues relating to couples in this situation. We will publish further information once the policy has been finalised.

    We recognise that it is important not to undermine the stability and outcomes for existing pension credit customers, so there will be no change for couples already in receipt of pension credit at the point of change.

    There are currently around 100,000 claims to pension credit from couples where one member is below the qualifying age for pension credit, 90,000 of these claimants are male and 10,000 are female.

  3. Ian Stewart says:

    Losers will be those whose dates of birth mean they will retire immediately prior to 2017. Take my case. I will reach 65 in December 2015 and under these proposals my pension under the current rules, is £107 a week. Now take someone who will reach 65 in 2017. If he has paid NIC Class 1 contributions for the required 35 years he will receive £144 under the new proposed scheme. Now if I and my hypothetical pensioner live for say 15 years, my pension will be £28,800 less than his over that time. A not insignificant amount. Now given I and my imaginary pensioneri have both paid a minimum of 35 years of NIC, but theoretically perhaps only 1 week has been paid by him under the new system (assume his 65th birthday is on 13/4/17 and the Gov favours the 6th of April as the change date), then for no extra outlay two pensioners separated by just 2 years are going to have a difference in pension of £28000++. This cannot be seen as equitable. Surely the fair way to proceed would be for those retiring in 2017 to be paid a pension made up of the current amount plus a prorata sum based on ?/35 of the £37/week increase, where the ? Is the number of years in which NIC at the new rate under the new scheme, has been paid. The Gov can’t object to such a proposal on financial grounds since it will clearly only be exposed to the maximum pension bill in 2052 when the first pensioner who has accumulated 35 years under the new scheme becomes eligible to the full £144. Only looking to be fair to the concept of the contract entered I to by all employees and the state over the past 40 years will the Gov avoid the involvement of the Euro Courts of Justice or Human Rights Commission, let one the backlash at the next election which could see not only the Lib Dems kicked off into the long grass!

  4. David Emsley says:

    I am 71 years of age and have continued working full time, with my State Pension being held until such time as I actually end my employment. I understand from the DWP that my State Pension (including SERPS contributions) is a little over £200 per week. Will that be reduced in 2015 to the new rate of £140 per week?

    • Shaun Brennan says:

      David, as we understand it the new flat rate State Pension will not start before April 2017 and people retiring before then will not be affected. I hope that helps you. Shaun Brennan, Investment Sense

  5. Dennis Johnson says:

    Hi, I took early retirement at the age of 61 and moved to Austria I have 30 years paid contribution, how will the proposals effect me will I get the £140 when I reach my official retirement in June 2016

    • Shaun Brennan says:

      Dennis, our understand is that the proposals don’t affect people retiring before April 2017, which is clearly after your proposed state pension age. I hope that helps, feel free to come back to us with any more questions. Shaun Brennan, Investment Sense

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