14 January 2013 Last updated at 12:04 ET
Pensions Minister Steve Webb: “People will retire with a single, simple, decent state pension”
Plans for a “simple” flat-rate state pension have been unveiled, but many of those entering the workforce now will be worse off than under current rules.
The government’s White Paper shows that there are short-term gainers but longer-term losers from the policy.
Instead of a basic pension of £107 a week plus various mean-tested top-ups, recipients will get £144 in today’s money from 2017 at the earliest.
The government said this was fairer for the self-employed and many mothers.
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.
Pension facts
- Currently 11.5 million people claim the state pension
- 2.8 million women receive a state pension of less than £80 a week. Only 474,000 men do so
- 3.2 million individuals receive pension credit to supplement their retirement income
Source: DWP
Anyone who has not paid NI for at least 10 years will not qualify for the new state pension at all.
‘Complicated’
The current full state pension is £107.45 a week, but can be topped up to £142.70 with the means-tested pension credit, and a state second pension which is based on National Insurance contributions.
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 and pension credit 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.
Winners and losers
Winners include:
The self-employed, who currently do not build up a state second pension
Those who have spent time out of the workforce, such as mothers and carers of those with disabilities, will benefit in the short-term
Losers include:
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 10 years of National Insurance contributions, who will get no state pension under the new rules
“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.
Overhaul
The change involves merging the state second pension with the basic state pension, to create one flat-rate payment.
The self-employed will benefit, as they tend to get a lower state pension. Women who have taken time out of the workplace to bring up children are also set to benefit.
“[These are] people who don’t make enough contributions throughout their working life to, in particular, the state second pension, which includes people with intermittent work patterns, periods of low earnings and the self-employed,” said Chris Curry, from the charity the Pensions Policy Institute.
Work and Pensions Secretary Iain Duncan Smith said: “This reform is good news for women who for too long have been effectively punished by the current system.
“The single tier will mean that more women can get a full state pension in their own right, and stop this shameful situation where they are let down by the system when it comes to retirement because they have taken time out to care for their family.”
Under the new system, anyone who works, has been claiming benefits for being unemployed, has been looking after children aged 12 or under, or caring for sick or disabled adults for 35 years will receive a fixed pension of £144 a week when they reach state pension age.
The amount will be lower if their if they have fewer “qualifying years” of this kind.
However, it will be updated each year – as the state pension is now – in line with earnings, prices, or 2.5%, whichever is higher.
Under established plans, the state pension age is rising to 66 for both men and women by 2020, with further plans for this to increase to 67 between 2026 and 2028.
Mr Webb told MPs that he wanted to see a review of the state pension age every five years, starting in the next Parliament.
He also said that all current workers’ accrued pension rights will be recognised, so the new system will have to involve some future pensioners being paid a top-up to the new, merged, flat-rate payment.
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