Last week the government announced its proposals for simplifying the state pension system. About time too. The current system has been meddled with and tweaked by previous governments to such an extent that it is now ludicrously complex. Indeed, it appears that a third of pensioners aren’t claiming the full amount that they’re entitled to.
Pensioners get £97.65 a week in basic state pension. Simple enough. But this is then boosted by a means-tested pension credit and, for some, the fiendishly complex state second pension (S2P). So everyone now gets at least £132.60 a week – but only if they fill in the right forms.
Last week’s green paper outlined two ways to simplify this system. The first would be to speed up the transition to a flat-rate, two-tier system by phasing out the earnings-related component of the S2P. That would mean people with a full 30 years of National Insurance contributions in both basic state pension and S2P would get around £145 a week. The second option – which is believed to be the government’s preferred choice – would see the state pension changed to a single-tier system, with pensioners receiving around a flat £140 a week.
A single flat-rate pension would be good news for women, low-paid workers, the self-employed, carers and stay-at-home mothers who don’t tend to build up a large S2P. But the losers will be middle-aged men with good jobs who’ve been building up an earnings-related S2P, but will probably not now get one. “Presently, people who are working more than 30 years end up with a higher second state pension, of up to £200 a week, to reflect their ongoing and additional contributions,” says John Ralfe, an independent pensions consultant in the Financial Times. “Under a single-tier pension, the most these future pensioners can expect is £140 a week, so they will be worse off.”
So those who have worked longest and earned the most – and therefore have had the greatest opportunity to build up a private pension pot – will be slightly worse off. The current system, on the other hand, hits those who haven’t worked full-time for long periods and hence not earned much of an S2P pension.
But the change is still welcome. “State pensions are meant to be a safety net, not a savings scheme,” says Lorna Bourke on Citywire.co.uk. A single-tier system would help, as we would all know what we would be getting from the state when we retire. That should encourage people to start saving for their own retirement. The arrival of an easy-to-comprehend state pension system alongside the National Employment Savings Trust – which will automatically enrol all employees in a pension scheme – will hopefully begin to turnaround Britain’s woefully inadequate pension planning.