New state pension proposals - what are they all about?

Published:
26 October 2010
Topic:
News,Money,Pensions

Government ministers have announced plans to make the state pension system fairer and more transparent. But, while the news has been widely welcomed, it also unleashes a whole raft of new questions...

What exactly are the proposals?

The government is proposing to replace the current complex state pension system with one flat rate of £140 a week for both men and women. Eligibility will no longer be based on National Insurance contributions but on residency in the UK.

What is the current state pension system?

At the moment, a single person - providing they have made the full National Insurance contributions to qualify for a full state pension - receives £97.65 a week, while a couple receives £156.15. But it gets more complicated than this.

Around 50% of pensioners claim Pension Credit on top of their state pension, which is means-tested and designed to ensure all pensioners are guaranteed to receive at least £132.60 a week to live on.

Other pensioners might qualify for earnings-related Second State Pension, known as S2P, which is paid to anyone still working and earning more than the National Insurance 'lower earnings limit' of £5,044 a year. Pensioners who are self-employed, however, do not qualify regardless of what they earn.

Are the changes a good thing?

The vast majority of people say yes. Firstly the reforms will entirely remove the need for any pensions-related means-testing, making the system much easier to understand. All pensioners, regardless of gender, National Insurance contributions and wealth, will receive a flat £140 a week, which is safely above the minimum earnings threshold.

 

The reforms will also deliver a fairer deal to women as many currently fail to qualify for the full basic state pension. This is because they have taken time out from work to bring up children or look after elderly relatives and therefore failed to build up enough National Insurance contributions. The new system would disregard this as it will be solely based on UK residency.

How much money will the changes save?

This big step-up in state pension payments will be paid for by abandoning the enormous bureaucracy that goes alongside processing claims for means-tested benefits.

For example, the cost of administering Pension Credit is £54 per person each year, according to government figures, which compares to the basic element of the state pension at a cost of just £5.40 per year. This, alongside other means-tested administration costs, will save the government an estimated £6 billion a year. The increase in the pension age to 66 for all by 2020 will save further billions from the government's coffers.

What about saving for my own pension?

Experts also claim that the changes would encourage people to save more for their own pension pot within the new National Employment Savings Trust (NEST) scheme, due to take effect from 2012.

This is because, under the current system, lower earners would be better off opting out of NEST as they would be forking out for benefits they would otherwise receive for nothing through additional means-tested pension top-ups. The scrapping of these means test will incentivise people to save for their own retirement - something that is high on the government's agenda.

When are the changes going to take place?

The proposed reforms will be detailed in a green paper by the end of the year and ministers are looking to introduce the changes before the end of the current parliament in 2015. Independent experts claim it is imperative that the changes are made before the state pension age for men and women increases to 66 in 2020.

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