State pension to undergo radical overhaul
Pensioners could benefit from a greater state pension entitlement by 2015, as the government announces plans for a “very radical” overhaul of the system.
The proposal, which is still in draft format, should be detailed in a green paper by the end of the year and is the brainchild of work and pensions secretary Iain Duncan Smith and pensions minister Steve Webb.
The pair are suggesting a flat rate payment of £140 a week to replace the current multi-tier system. At the moment the basic state pension is £97.65 per week for a single person and £156.15 for a couple. On top of this poorer pensioners can claim pension credits to increase their income.
With the proposed changes everyone would receive the same amount, an increase in expenditure ministers say will pay for itself through efficiency savings.
The move would be particularly beneficial to women who often miss out on the full basic state pension because of missed national insurance contributions during child-rearing years.
In addition, the changes would see the removal of complex means testing, introduced by Gordon Brown, which stops many pensioners from applying for their full entitlement because they find it degrading.
One potential sore point in removing means testing is that richer pensioners will also see their income boosted. But since pensions are taxed, anyone who has savings, investments or private pensions that take them above the income tax allowance (currently £9,490 for over 65s) will be taxed on the boosted income anyway.
Ros Altman, a former treasury pensions adviser and now director general of Saga, says: “For years, Government has tinkered with our current inadequate state pension system, adding to its complexity, while failing to address the fundamental problems associated with mass means-testing of pensioners.
“This is because anyone retiring can receive many different elements of state pension. There is a basic state pension, a second state pension, some state earnings related pension - or SERPS - plus the graduated pension.
“All of these have different qualification criteria and come from contributions made in different years. And if all these are not enough, nearly half of pensioners can claim a complex, means-tested pension credit, which consists of a guarantee credit and a savings credit. What a mess!”
The National Association of Pension Funds also welcomes the proposed overhaul. It says with the retirement age heading upwards the trade-off for having to work longer must be a better state pension.
Last week, in the spending review George Osborne announced a rise in the retirement age to 66 by 2020 for both men and women. The aim is for the reformed state pension to be in place by the end of this parliament in 2015.
State Earnings Related Pension
SERPS was the name of the government’s additional pension scheme that lasted until April 2002 and it is now called the State Second Pension (SP2). Anyone earning more than over £75 a week and had not “contracted out” would have been building up an additional pension under SERPs. If you started a personal pension plan, you “contracted out” of SERPs and the government paid part of your National Insurance contributions into the plan once a year in the form of a rebate. However, as SERPs was directly related to earnings, the amount people will get when they retire will vary.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.