What has been announced?
The Minister for Pensions Steve Webb announced the main details in the White Paper on 14 January 2013. In short, a new flat-rate state pension is likely to take effect in 2017 at the earliest, and there will be in future just one component to the state pension.
Why the change?
The current system is too complicated and the Government want to simplify the system so people know what they will be paid when they reach their pension age. Currently, state pension can be paid from membership of the basic, Graduated, SERPS and Second State Pensions, all with their own complicated formulas.
When is the change likely?
The Government are targeting new pensioners from 6th of April 2017 to be paid a flat rate of £144, plus inflation rises between now and 2017 (therefore likely to have increased to about £160). The current full basic state pension is £107.45 a week, and with the second state pension/pension credit it can increase to £142.70. No one will build up any more entitlements to the second state pension after the flat rate is introduced.
The Government will also carry out a series of five year reviews of the state pension age, but not in this parliament. The review will be on the basis that as life expectancy increases, the state pension age should also rise.
Who Wins?
It is estimated around 1½ million pensioners who currently do not claim pension credit will be paid what they are owed under this new system.
The self employed are set to benefit as they normally qualify for a lower overall state pension as they do not qualify for the state second pension.
Every individual will qualify for a pension in their own right, with no complex rules about claiming pensions based on the National Insurance Contribution (NIC) record of a spouse.
Who loses?
It is proposed that anyone who has not paid NIC for at least 10 years will not get a pension.
Those who have paid NIC for less than 35 years will have their pension reduced; up from the 30-year accrual introduced a few years ago. However, people who do not have a full NIC record can in some circumstances “buy” them later, even after retirement (subject to the six-year rule).
People who have already retired when the new system is introduced will keep their existing entitlements. If you have built up an entitlement to a combined state pension of more than the flat rate, you will still get it, but the trade off is part of the pension above the £144 flat rate will not be subject to the “triple lock” for annual increases; the extra payment will rise with CPI.
Receiving the new flat-rate pension will be determined by whether you have reached the state pension age on 6th April 2017. You cannot circumnavigate this by deferring to draw your pension until after April 2017. In addition, it will no longer be possible to defer taking your state pension in exchange for a lump sum, although you will still be able to delay it in exchange for a higher pension.
Contracting out will be abolished for final salary schemes when the new pension comes in, which means members will have to pay an extra 1.4pc of salary in NIC.
Action
Quite clearly, the Government has decided to finally scrap the fiendish calculations and permutations of the UK state pension system, and replace it with a simpler system. There are of course going to be winners and losers, but on the whole simplifying the state pension is to be welcomed.
You may be interested to find out what state pension you have already accrued; the Government have set up https://www.gov.uk/state-pension-statement to assist you find the details.
The challenge now is for the Government to stop meddling with the private pension system, which each year moves away from the idea of Pension Simplification announced during 2006.
Our role is to strip away the complexity of retirement planning and provide our clients with real retirement solutions they can control. After all, not many people will be satisfied to retire on the new flat-rate state pension of £7,488 gross pension per annum. Fiducia builds successful retirement strategies that embrace both the formal solutions (i.e. private pensions) and complimentary structures (such as ISAs, cash, investment portfolios etc) to provide a flexible, accessible and understandable strategy.
We welcome any questions relating to retirement planning, especially our specialist subject of Pensions. Please do contact us for expert advice.
