It was announced yesterday that a flat rate State Pension of £144 per week, in today’s terms, would be introduced in 2017. This will replace the current and quite frankly over complicated system of Basic State Pension, SERPS, State Second Pension, Graduated Pension and Pension Credit.
Inevitably there will be winners and losers. Most noticeable winners will be the self-employed, who can’t build up a State Second Pension entitlement and those who have spent time out of the workforce, such as mothers and carers of those with disabilities, will benefit in the short-term.
The losers will include many of those entering the workforce now are likely to receive less than they would have done had the current system remained in place
Those who have fewer than seven, or possibly even 10, years of National Insurance contributions, who will get no state pension under the new rules.
Some of the other losers will be those whose State Pension Age falls prior to 2017.
Figures in the White Paper, published on Monday afternoon, suggested that at least half of all people reaching state pension age before 2050 were likely to have a better outcome under the new system than they would if the current system were to continue. Of these, the majority would be better off by at least £2 per week.
However, by 2060, more than half would be worse off than if the current system continued, because they could not build up a state second pension.
After April 2017, people will also have to work longer, making 35 years’ worth of National Insurance (NI) contributions, rather than the current 30, to qualify for the full pension.
The system of pension credit will continue, but only to provide those ineligible for the new pension with a safety net.
Anyone who qualifies for the state pension before April 2017 will continue to receive their entitlement under the current system.For new pensioners from April 2017, the second state pension will be abolished.
The replacement – the universal flat-rate payment in England, Wales and Scotland – will be the biggest overhaul of the pension system for decades.
Pensions Minister Steve Webb said that the single payment would make it clearer for people to see how much extra they needed to save, in private or workplace pension schemes, for a comfortable retirement.
He told MPs that 10 million people were not saving enough for their pension.
“The current state pension system is too complicated and leaves millions of people needing means-tested top-ups,” he said.
“Our simple, single-tier pension will provide a decent, solid foundation for new pensioners in an otherwise less certain world, ensuring it pays to save.”
But Labour said that the government had “dithered and delayed” over proposing reforms.
“We support sensible pensions reform but this government has consistently acted with secrecy and incompetence and we will study these plans very closely to ensure ministers are completely straight with the millions of hardworking people who will lose out under these plans,” said Gregg McClymont, the shadow pensions minister.
There is no perfect solution but one thing is for sure, if you want an enjoyable lifestyle in retirement and don’t want to work forever you need to save for your retirement and not rely on the State Pension in whatever format it is.