Government unveils details of new flat-rate pensions

The Government has revealed details of its new flat-rate pensions initiative
The Government has revealed details of its new flat-rate pensions initiative
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THE Government has unveiled plans for a new single rate pension to be paid to all from 2017 in the biggest shake up in the state pension since the Second World War.

• Flat-rate pension will see end of pension credits and top-ups

The changes will mean that instead of a basic pension of £107 a week plus various means-tested top-ups, recipients will receive £144 in today’s money.

But as Lib Dem pensions minister Steve Webb got to his feet to unveil their white paper on pension reform there was a warning from a leading economic thinktank that up to half of pensioners will be worse off as a result of the changes by 2060.

The Institute of Fiscal Studies (IFS) said that high earners and recent immigrants will be among the hardest hit, but that the problems will go much wider.

Meanwhile Labour pointed out that 429,000 women in the UK, including 39,000 in Scotland, on the verge of retirement will miss out under the Government’s pensions reforms while men in the same position will still benefit.

And there were concerns that the measures could disguise a new tax grab of £6 billion by the Treasury through increased National Insurance contributions.

In his statement to the Commons, Mr Webb insisted that the reforms would mean there were more winners than losers.

He claimed that the changes were based on the original ideas for social reforms set out by economist William Beveridge in 1942.

But he said pensions were now too complex and difficult to explain, whilst millions of people did not receive enough to live on from the two state pensions combined and had to rely on pension credits.

Mr Webb said the Government must “do better”, adding there was a consensus there must be a single state pension.

The new system would cost as much as the current state pension, he added, telling MPs the Government’s plans did not constitute a “give-away for the next generation”.

The new single tier pension will be available for people who have worked at least 10 years, but that to get the full amount people will have needed to have worked at least 35 years.

Pension age

State pension age would be reviewed once every five years but there would be no further reviews during this parliament, MPs heard, and Mr Webb added that there would be an assumption that people work for 50 years.

“Last month was the 70th anniversary of the Beveridge Report,” he said. “The original idea from Beveridge was for a single, simple, decent state pension, paid for at the end of a lifetime of national insurance contributions.

“We have drifted a very long way from that blueprint.”

Mr Webb added: “Our analysis shows that more than 10 million people at work today are not saving enough to generate the sort of income they want to receive in retirement.

“A combination of a single, simple, decent state pension and the right to a workplace pension with a statutory minimum contribution from their employer will mean for the first time there will be a firm foundation for retirement for the workforce of today.”

But the Government’s White Paper revealed that a number of people will lose out.

‘Worse off’

Under the new system, around one in five people reaching state pension age after 2017 will be better off, less than one in 10 will be worse off and the others will see no difference.

But the proportion who will be worse off will rise rapidly, with more than half of people reaching state pension age after 2060 left worse off. The majority of these will be worse off by more than £2.

The IFS said the proposals implied a cut in pension entitlements for most people in the long run.

The IFS said that while the announcement looked like a “welcome simplification”, it warned: “While there will be a fairly complex pattern of winners and losers from the reform in the short-term, the main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups, most notably the self-employed.”

The warning was taken up by the unions who accused the government of hitting the low paid worst.

TUC General Secretary Frances O’Grady said: “We need to simplify a system that few understand, help low-paid women workers - who have never been served by our current system - and the self-employed. But there are real problems about how those ends can be achieved and on what timescale.

“Today’s pensioners will be angry that they miss out on this reform and face continued threats to remove the winter fuel allowance and help with travel. The increases in the state pension age redistribute from poorer people with shorter life expectancies to the better-off who live longer.”

Simple

However, experts and business groups welcomed the changes.

Charles Cotton, of the Chartered institute of Personnel and Development, said: “This is a long-term decision, which has the real potential to bring about a step-change for the better in the retirement income of Britain’s employees.

“By creating a simple, easy to understand baseline pension, it will become a lot easier for employers and others to explain and encourage more workers to invest more in pensions savings to boost retirement incomes closer to the levels most would aspire to.”

Andrew Vaughan, Chairman of the Association of Consulting Actuaries said: “We have argued for well over a decade that this was needed so people could build their private pension above this with fewer fears that their savings would merely displace entitlements to state benefits.

“Moving the state pension age in line with longevity improvements in a timely way is also welcomed.”

Joanne Segars, Chief Executive of the National Association of Pension Funds, said: “Today’s announcement for a simpler, more generous state pension is a much-needed shake-up that will ultimately help millions of pensioners and savers. For the first time in a generation, people will know that it pays to save, and that whatever they put aside won’t be eroded by means-testing when they retire.”

Neil Carberry of the CBI said: “These reforms will give real clarity and certainty about how much retirement income people will get from the state and how much they need to save privately through auto-enrolment schemes. It is right that the changes will protect state pension entitlements built up before the reforms kick in.”

But Labour’s shadow pensions minister Gregg McClynmont said that 429,000 women born between April 6, 1952, and July 6, 1953, will miss out on the new single tier pension, while men would controversially still be eligible.

In a question to Pensions Minister Steve Webb in the Commons, he said: “Even at my speed reading of this White Paper there will be heavy losers, steep cliff ledges and significant costs if this proposal goes ahead.

Mr McClymont also claimed existing pensioners would miss out.

He added: “And let me dig a little deeper? You referred to existing pensioners - is it the case that this proposal excludes all those existing pensioners and all those who intend to retire before 2017?

“If that is the case, what is your message to those 15 or 16 million pensioners in my calculation who will not be eligible for the new pension.”

Mr McClymont also accused the Government of a “tax grab” by handing back money from the 1.4 per cent National Insurance rise to the Treasury.

He also criticised the decision to put the number of years needed to qualify for a full state pension back up to 35 years.