Pensions: Simpler format marks a 'turning point' in benefit

By Chiara Cavaglieri
Thursday 24 March 2011 01:00

A flat-rate pension that will pay about £140 a week will be simpler and most likely benefit women, many of whom are currently denied the full state pension after taking time out of work to look after children.

As things stand, there are, confusingly, several ways to get pension money from the state: the basic pension, the additional state pension (S2P) and means-tested Pension Credits. Under the new proposals, these will all be scrapped in place of a flat-rate payment of £140 to all pensioners, which is greater than the amount people currently receive through the basic state pension and means-tested pension credit.

Details will be laid out in a Green Paper but the new-look state pension will continue to be based on contributions and cost no more than the current system. We don't know how this will be worked out but we do know that the Government plans to merge NI with Income Tax, and crucially, the Chancellor has said the reforms are likely to take "years" to come into effect and so will not apply to today's pensioners.

"This is a turning point for pensions in the UK," said Joanne Segars, chief executive of the National Association of Pension Funds. "Over half a million new pensioners a year will get a simpler and more generous state pension, and reliance on means-tested benefits will be slashed."

The self-employed – who cannot currently benefit from the additional state pension – will also be better off.

However, one casualty will be the end of contracting out for final-salary schemes – where employers replace part of what their employees would normally get from the state in return for a rebate on NI contributions.

"Under auto-enrolment employers are already facing a substantial increase to their pensions bill; this is likely to finish off any lingering support they may have for final-salary pensions," said Tom McPhail, head of pensions at Hargreaves Lansdown.

Concerns have also been raised at the news that future changes to the state pension age will be based on regular, independent reviews of life expectancy, ahead of plans already in place to increase it to 66 in April 2020. "We must guard against any automatic system for future increases being based solely on average life expectancy," said Age UK's Michelle Mitchell. "Other factors must be taken into account."

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